Form 10-Q REALNETWORKS INC For: Sep 30

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November 6, 2014 6:03 AM EST

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



�	FORM 10-Q	�

(Mark One)



�	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended September�30, 2014



�	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ��to ��

Commission file number 0-23137



�	�RealNetworks, Inc.			�
�	(Exact name of registrant as specified in its charter)			�
Washington		�	91-1628146
(State of incorporation)		�	(I.R.S. Employer Identification Number)
�	�	�	�	�
1501 First Avenue South, Suite 600 Seattle, Washington		�	98134
(Address of principal executive offices)		�	(Zip Code)
�	(206) 674-2700			�
�	(Registrants telephone number, including area code)			�

Indicate by check mark whether the registrant: (1)�has filed all reports required to be filed by Section�13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2)�has been subject to such filing requirements for the past 90 days.��Yes��No��

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (�232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).��Yes��No��

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of large accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act. (Check one):



Large�accelerated�filer	�	�	��	Accelerated�filer	�
�	�		�		�
Non-accelerated filer	�	��(Do not check if a smaller reporting company)	��	Smaller�reporting�company	�

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).��Yes��No��

The number of shares of the registrants Common Stock outstanding as of October�31, 2014 was 36,034,025.

TABLE OF CONTENTS

�



�	Page
�	�
Part I. Financial Information	3
Item�1. Financial Statements	3
Item�2. Managements Discussion and Analysis of Financial Condition and Results of Operations	16
Item�3. Quantitative and Qualitative Disclosures About Market Risk	28
Item�4. Controls and Procedures	29
Part II. Other Information	31
Item�1. Legal Proceedings	31
Item�1A. Risk Factors	31
Item�2. Unregistered Sales of Equity Securities and Use of Proceeds	39
Item�3. Default Upon Senior Securities	40
Item�4. Mine Safety Disclosures	40
Item�5. Other Information	40
Item�6. Exhibits	40
Signature	41
Index to Exhibits	42

PART I. FINANCIAL INFORMATION


Item 1.	Financial Statements

REALNETWORKS, INC. AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except per share data)



�	September�30, 2014			�	December�31, 2013
ASSETS	�			�	�
Current assets:	�			�	�
Cash and cash equivalents	$	114,073		�	$	151,235
Short-term investments	63,948			�	74,920
Trade accounts receivable, net of allowances	17,679			�	24,613
Deferred costs, current portion	1,023			�	1,601
Deferred tax assets, net, current portion	296			�	306
Prepaid expenses and other current assets	8,382			�	9,124
Total current assets	205,401			�	261,799
Equipment, software, and leasehold improvements, at cost:	�			�	�
Equipment and software	83,230			�	86,721
Leasehold improvements	3,616			�	3,482
Total equipment, software, and leasehold improvements, at cost	86,846			�	90,203
Less accumulated depreciation and amortization	68,392			�	67,031
Net equipment, software, and leasehold improvements	18,454			�	23,172
Restricted cash equivalents and investments	3,000			�	3,000
Equity method investment	10,000			�	12,473
Available for sale securities	2,848			�	7,181
Other assets	2,925			�	2,332
Deferred costs, non-current portion	913			�	946
Deferred tax assets, net, non-current portion	1,424			�	1,409
Other intangible assets, net	10,954			�	12,993
Goodwill	17,615			�	17,476
Total assets	$	273,534		�	$	342,781
LIABILITIES AND SHAREHOLDERS EQUITY	�			�	�
Current liabilities:	�			�	�
Accounts payable	$	18,155		�	$	19,987
Accrued and other current liabilities	25,885			�	41,893
Deferred tax liabilities, net, current portion	768			�	899
Deferred revenue, current portion	6,908			�	7,498
Total current liabilities	51,716			�	70,277
Deferred revenue, non-current portion	143			�	166
Deferred rent	1,293			�	1,318
Deferred tax liabilities, net, non-current portion	1,805			�	1,556
Other long-term liabilities	563			�	483
Total liabilities	55,520			�	73,800
Commitments and contingencies				�
Shareholders equity:	�			�	�
Preferred stock, $0.001 par value, no shares issued and outstanding:	�			�	�
Series A: authorized 200 shares				�
Undesignated series: authorized 59,800 shares				�
Common stock, $0.001 par value authorized 250,000 shares; issued and outstanding 36,034 shares in 2014 and 35,833 shares in 2013	36			�	36
Additional paid-in capital	616,260			�	610,167
Accumulated other comprehensive loss	(53,778		)	�	(47,695		)
Retained deficit	(344,504		)	�	(293,527		)
Total shareholders equity	218,014			�	268,981
Total liabilities and shareholders equity	$	273,534		�	$	342,781

See accompanying notes to unaudited condensed consolidated financial statements.

REALNETWORKS, INC. AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

AND COMPREHENSIVE INCOME (LOSS)

(In thousands, except per share data)



�	Quarters Ended September 30,							�	Nine Months Ended September 30,
�	2014			�	2013			�	2014			�	2013
Net revenue (A)	$	34,157		�	$	48,958		�	$	120,706		�	$	155,601
Cost of revenue (B)	18,928			�	18,990			�	58,500			�	59,015
Extinguishment of liability (See Note 10)				�				�	(10,580		)	�
Gross profit	15,229			�	29,968			�	72,786			�	96,586
Operating expenses:	�			�	�			�	�			�	�
Research and development	12,784			�	15,707			�	40,110			�	45,951
Sales and marketing	13,283			�	19,427			�	51,022			�	59,830
General and administrative	7,723			�	9,869			�	25,617			�	28,506
Restructuring and other charges	2,048			�	1,877			�	3,805			�	4,075
Lease exit and related charges	154			�				�	703			�	3,066
Loss on legal settlements				�	11,525			�				�	11,525
Total operating expenses	35,992			�	58,405			�	121,257			�	152,953
Operating income (loss)	(20,763		)	�	(28,437		)	�	(48,471		)	�	(56,367		)
Other income (expenses):	�			�	�			�	�			�	�
Interest income, net	80			�	166			�	396			�	992
Gain (loss) on sale of available for sale securities, net				�				�	2,371			�
Equity in net loss of Rhapsody investment	(1,530		)	�	(2,629		)	�	(4,170		)	�	(6,209		)
Other income (expense), net	325			�	(118		)	�	153			�	(146		)
Total other income (expenses), net	(1,125		)	�	(2,581		)	�	(1,250		)	�	(5,363		)
Income (loss) before income taxes	(21,888		)	�	(31,018		)	�	(49,721		)	�	(61,730		)
Income tax expense (benefit)	290			�	357			�	1,256			�	(210		)
Net income (loss)	$	(22,178	)	�	$	(31,375	)	�	$	(50,977	)	�	$	(61,520	)
Basic net income (loss) per share	$	(0.62	)	�	$	(0.88	)	�	$	(1.42	)	�	$	(1.73	)
Diluted net income (loss) per share	$	(0.62	)	�	$	(0.88	)	�	$	(1.42	)	�	$	(1.73	)
Shares used to compute basic net income (loss) per share	36,003			�	35,670			�	35,912			�	35,490
Shares used to compute diluted net income (loss) per share	36,003			�	35,670			�	35,912			�	35,490
Comprehensive income (loss):	�			�	�			�	�			�	�
Unrealized investment holding gains (losses), net of reclassification adjustments	$	(323	)	�	$	(1,043	)	�	$	(3,936	)	�	$	(28	)
Foreign currency translation adjustments, net of reclassification adjustments	(2,338		)	�	1,235			�	(2,147		)	�	(391		)
Total other comprehensive income (loss)	(2,661		)	�	192			�	(6,083		)	�	(419		)
Net income (loss)	(22,178		)	�	(31,375		)	�	(50,977		)	�	(61,520		)
Comprehensive income (loss)	$	(24,839	)	�	$	(31,183	)	�	$	(57,060	)	�	$	(61,939	)
(A) Components of net revenue:	�			�	�			�	�			�	�
License fees	$	5,925		�	$	10,503		�	$	21,168		�	$	33,494
Service revenue	28,232			�	38,455			�	99,538			�	122,107
�	$	34,157		�	$	48,958		�	$	120,706		�	$	155,601
(B) Components of cost of revenue:	�			�	�			�	�			�	�
License fees	$	2,044		�	$	2,062		�	$	6,426		�	$	6,377
Service revenue	16,884			�	16,928			�	52,074			�	52,638
�	$	18,928		�	$	18,990		�	$	58,500		�	$	59,015

See accompanying notes to unaudited condensed consolidated financial statements.

REALNETWORKS, INC. AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)



�	Nine Months Ended September 30,
�	2014			�	2013
Cash flows from operating activities:	�			�	�
Net income (loss)	$	(50,977	)	�	$	(61,520	)
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:	�			�	�
Depreciation and amortization	8,876			�	15,045
Stock-based compensation	4,158			�	5,671
Equity in net loss of Rhapsody	4,170			�	6,209
Deferred income taxes, net	(64		)	�	(1,238		)
Gain on sale of available for sale securities	(2,371		)	�
Realized translation gain	(48		)	�	(35		)
Extinguishment of liability	(10,580		)	�
Other				�	51
Net change in certain operating assets and liabilities:	�			�	�
Trade accounts receivable	6,553			�	6,466
Prepaid expenses and other assets	1,353			�	4,772
Accounts payable	(1,606		)	�	26
Accrued and other liabilities	(5,106		)	�	(3,750		)
Net cash provided by (used in) operating activities	(45,642		)	�	(28,303		)
Cash flows from investing activities:	�			�	�
Purchases of equipment, software, and leasehold improvements	(2,054		)	�	(5,798		)
Proceeds from sale of available for sale securities	2,754			�
Purchases of short-term investments	(63,574		)	�	(85,670		)
Proceeds from sales and maturities of short-term investments	74,546			�	110,359
Decrease (increase) in restricted cash equivalents and investments, net				�	5,000
Acquisitions of businesses, net of cash acquired	(733		)	�	(22,480		)
Other	(467		)	�
Net cash provided by (used in) investing activities	10,472			�	1,411
Cash flows from financing activities:	�			�	�
Proceeds from issuance of common stock (stock options and stock purchase plan)	641			�	408
Tax payments from shares withheld upon vesting of restricted stock	(403		)	�	(911		)
Payment of contingent consideration	(696		)	�	(828		)
Net cash provided by (used in) financing activities	(458		)	�	(1,331		)
Effect of exchange rate changes on cash and cash equivalents	(1,534		)	�	(96		)
Net increase (decrease) in cash and cash equivalents	(37,162		)	�	(28,319		)
Cash and cash equivalents, beginning of period	151,235			�	163,198
Cash and cash equivalents, end of period	$	114,073		�	$	134,879
Supplemental disclosure of cash flow information:	�			�	�
Cash received from income tax refunds	$	292		�	$	8,354
Cash paid for income taxes	$	1,457		�	$	2,988
Non-cash investing activities:	�			�	�
Increase (decrease) in accrued purchases of equipment, software, and leasehold improvements	$	(371	)	�	$	1,096

See accompanying notes to unaudited condensed consolidated financial statements.

REALNETWORKS, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Quarters and Nine Months Ended September�30, 2014 and 2013

Note 1. Description of Business and Summary of Significant Accounting Policies

Description of Business. RealNetworks, Inc. and subsidiaries is a leading global provider of network-delivered digital media applications and services that make it easy to manage, play and share digital media. The Company also develops and markets software products and services that enable the creation, distribution and consumption of digital media, including audio and video.

Inherent in our business are various risks and uncertainties, including a limited history of certain of our product and service offerings. RealNetworks' success will depend on the acceptance of our technology, products and services and the ability to generate related revenue.

In this Quarterly Report on Form 10-Q (10-Q or Report), RealNetworks, Inc. and Subsidiaries is referred to as RealNetworks, the Company, we, us, or our. RealPlayer, LISTEN and other trademarks of ours appearing in this report are our property. ��

Basis of Presentation. The unaudited condensed consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. Intercompany balances and transactions have been eliminated in consolidation.

The unaudited condensed consolidated financial statements reflect all adjustments, consisting only of normal, recurring adjustments that, in the opinion of the Companys management, are necessary for a fair presentation of the results of operations for the periods presented. Operating results for the quarter and nine months ended September�30, 2014 are not necessarily indicative of the results that may be expected for any subsequent period or for the year ending December�31, 2014. Certain information and disclosures normally included in financial statements prepared in conformity with accounting principles generally accepted in the United States of America (GAAP) have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission (SEC).

These unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and related notes included in our Annual Report on Form 10-K for the year ended December�31, 2013 (the 10-K).

Use of Estimates.�The preparation of financial statements in conformity with GAAP�requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. In addition, current economic conditions may require the use of additional estimates, and certain estimates we make are subject to a greater degree of uncertainty as a result of the current economic conditions.

Note 2. Recent Accounting Pronouncements

��

In August 2014, the Financial Accounting Standards Board (FASB) issued a new standard, "Disclosure of Uncertainties About an Entity's Ability to Continue as a Going Concern". This standard provides guidance around management's responsibility to evaluate whether there is substantial doubt about an entity's ability to continue as a going concern and to provide related footnote disclosures. The new guidance is effective for all annual and interim periods ending after December 15, 2016. We do not expect the adoption of this standard to have a material effect on our consolidated financial statements.

In May 2014, the FASB issued new revenue recognition guidance. The guidance will require an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. The new guidance will replace most existing revenue recognition guidance in U.S. GAAP when it becomes effective. The new guidance is effective for us on January 1, 2017. Early application is not permitted. The guidance permits the use of either the retrospective or cumulative effect transition method. We are evaluating the effect that the guidance will have on our consolidated financial statements and related disclosures. We have not yet selected a transition method nor determined the effect of the standard on our ongoing financial reporting. ��

In April 2014, the FASB issued new guidance related to discontinued operations. The guidance changes the criteria for reporting discontinued operations and modifies the related disclosure requirements. Under the new guidance, a discontinued operation is defined as a disposal of a component or group of components that represents a strategic shift that has, or will have, a major effect on an entity's operations and financial results.� The new guidance is effective for us on January 1, 2016. We are evaluating the impact that this guidance may have on our consolidated financial statements and related disclosures.

There have been no other recent accounting pronouncements or changes in accounting pronouncements to be implemented that are of significance or potential significance to RealNetworks.

Note 3. Acquisitions

In the quarter ended June 30, 2013, we acquired 100% of the voting interests in Slingo, Inc., a social casino games company based in the U.S., for total cash consideration of $15.6 million. The tangible and intangible assets and liabilities recognized are reported within the Games segment. The identifiable intangible assets associated with the acquisition totaled $8.0 million. Of this total, $4.5 million was related to tradenames and trademarks determined to have indefinite useful lives and will be evaluated annually in our fourth quarter for impairment, or more frequently, if circumstances indicate an impairment may exist. The remaining $3.5 million includes developed game technology and existing customer relationships with finite lives, and is being amortized over their useful lives. We recorded a net deferred tax liability of $2.7 million related to the intangible assets acquired. Goodwill totaling $9.9 million was recorded, representing the excess of purchase consideration over the fair value of net acquired assets, and was primarily related to the assembled workforce and expected synergies in the rapidly growing social casino games market. The goodwill is not deductible for income tax purposes. We expect this acquisition to enhance our footprint in the social casino games arena.

In the quarter ended September 30, 2013, we acquired 100% of the voting interests in Muzicall Limited, a ringback tone company based in London, for total cash consideration of $6.7 million. The tangible and intangible assets and liabilities recognized are reported in the Mobile Entertainment segment. The identifiable intangible assets associated with the acquisition totaled $5.4 million, and include tradenames and trademarks, developed technology, user base and carrier relationships. All identifiable intangible assets from this acquisition have finite lives, and are being amortized over their useful lives. We recorded a net deferred tax asset of $3.4 million related to the assets acquired, and a full valuation allowance. Goodwill totaling $1.3 million was recorded, representing the excess of purchase consideration over the fair value of net acquired assets acquired, and was primarily related to the assembled workforce and expected synergies in the ringback tone industry. The goodwill is not deductible for income tax purposes. This acquisition is intended to accelerate our growth initiatives within the Mobile Entertainment segment.

Note 4. Stock-Based Compensation

Total stock-based compensation expense recognized in our consolidated statements of operations includes amounts related to stock options, restricted stock units, and employee stock purchase plans and was as follows (in thousands):

�



�	Quarters Ended September 30,					�	Nine Months Ended September 30,
�	2014		�	2013		�	2014		�	2013
Total stock-based compensation expense	$	1,148	�	$	1,613	�	$	4,158	�	$	5,671

The fair value of options granted determined using the Black-Scholes model used the following weighted-average assumptions:

�



�	Quarters Ended September 30,					�	Nine Months Ended September 30,
�	2014		�	2013		�	2014		�	2013
Expected dividend yield	0	%	�	0	%	�	0	%	�	0	%
Risk-free interest rate	1.30	%	�	0.96	%	�	1.20	%	�	0.82	%
Expected life (years)	4.5		�	3.8		�	3.9		�	4.0
Volatility	42	%	�	48	%	�	40	%	�	48	%

The total stock-based compensation amounts for 2014 and 2013 disclosed above are recorded in their respective line items within operating expenses in the consolidated statement of operations. As of September�30, 2014, we had $12.1 million of total unrecognized compensation cost, net of estimated forfeitures, related to stock awards. The unrecognized compensation cost is expected to be recognized over a weighted-average period of approximately 3 years.

Note 5. Rhapsody Joint Venture

As of September�30, 2014 we owned approximately 45% of the issued and outstanding stock of Rhapsody and account for our investment using the equity method of accounting.

Rhapsody was initially formed in 2007 as a joint venture between RealNetworks and MTV Networks, a division of Viacom International Inc. (MTVN), to own and operate a business-to-consumer digital audio music service known as Rhapsody. Prior to March�31, 2010, we held a 51% interest in Rhapsody and MTVN owned the remaining 49%. On March�31, 2010, restructuring transactions involving Rhapsody were completed, and as a result, effective March�31, 2010 RealNetworks owned approximately 47% of Rhapsody. Subsequent to the restructuring transaction, we have accounted for our investment in Rhapsody using the equity method of accounting.

As part of the 2010 restructuring transactions, RealNetworks contributed $18.0 million in cash, the Rhapsody brand and certain other assets, including content licenses, in exchange for shares of convertible preferred stock of Rhapsody, carrying a $10.0 million preference upon certain liquidation events.

Subsequent to the 2010 restructuring transactions, RealNetworks provided certain operational transition services to Rhapsody. These transition services were completed in 2013, and RealNetworks has no further obligations or liabilities pursuant to the support services agreement.

We recorded our share of losses of Rhapsody of $1.5 million and $4.2 million for the quarter and nine months ended September�30, 2014, respectively. Because of the $10.0 million liquidation preference on the preferred stock we hold in Rhapsody, under the equity method of accounting we do not record any share of Rhapsody losses that would reduce our carrying value of Rhapsody, which is impacted by Rhapsody equity transactions, below $10.0 million, unless Rhapsody's book value is reduced below $10.0 million. The carrying value of our Rhapsody investment was $12.5 million as of December 31, 2013 and as of September�30, 2014 was $10.0 million.

Our share of the losses of Rhapsody for the quarter and nine months ended September�30, 2013 were $2.6 million and $6.2 million, respectively.

Summarized financial information for Rhapsody, which represents 100% of their financial information (in thousands):

�



�	Quarters Ended September 30,							�	Nine Months Ended September 30,
�	2014			�	2013			�	2014			�	2013
Net revenue	$	44,148		�	$	35,190		�	$	128,578		�	$	103,831
Gross profit	7,739			�	7,800			�	24,730			�	24,412
Net loss	(7,965		)	�	(5,621		)	�	(14,312		)	�	(14,812		)

Note 6. Fair Value Measurements

Items Measured at Fair Value on a Recurring Basis

The following table presents information about our financial assets that have been measured at fair value on a recurring basis as of September�30, 2014 and December�31, 2013, and indicates the fair value hierarchy of the valuation inputs utilized to determine such fair value (in thousands).

�

Fair Value Measurements as of

�

Amortized Cost as of

�

September�30, 2014

�

September 30, 2014

�

Level 1

�

Level�2

�

Level�3

�

Total

�

Cash and cash equivalents:

�

Cash

28,213

�

28,213

�

28,213

Money market funds

�

5,092

�

5,092

�

5,092

Corporate notes and bonds

�

80,768

�

80,768

�

80,768

Total cash and cash equivalents

28,213

�

85,860

�

114,073

�

114,073

Short-term investments:

�

Corporate notes and bonds

�

53,246

�

53,246

�

53,195

U.S. government agency securities

10,702

�

10,702

�

10,701

Total short-term investments

10,702

�

53,246

�

63,948

�

63,896

Restricted cash equivalents and investments

�

3,000

�

3,000

�

3,000

Equity investment in publicly traded securities

2,848

�

2,848

�

428

Total

41,763

�

142,106

�

183,869

�

181,397

�

Fair Value Measurements as of

�

Amortized Cost as of

�

December�31, 2013

�

December 31, 2013

�

Level 1

�

Level�2

�

Level�3

�

Total

�

Cash and cash equivalents:

�

Cash

46,978

�

46,978

�

46,978

Money market funds

�

26,913

�

26,914

�

26,914

Corporate notes and bonds

�

77,043

�

77,043

�

77,044

U.S. government agency securities

�

300

�

300

�

300

Total cash and cash equivalents

46,979

�

104,256

�

151,235

�

151,236

Short-term investments:

�

Corporate notes and bonds

�

59,766

�

59,766

�

59,713

U.S. government agency securities

14,077

�

1,077

�

15,154

�

15,159

Total short-term investments

14,077

�

60,843

�

74,920

�

74,872

Restricted cash equivalents and investments

�

3,000

�

3,000

�

3,000

Equity investment in publicly traded securities

7,181

�

7,181

�

842

Total

68,237

�

168,099

�

236,336

�

229,950

Restricted cash equivalents and investments amounts as of September 30, 2014, and December�31, 2013 relate to cash pledged as collateral against a letter of credit in connection with a lease agreement.

Realized gains or losses on sales of short-term investment securities for the quarters and nine months ended September 30, 2014 and 2013 were not significant. Gross unrealized gains and gross unrealized losses on short-term investment securities as of September 30, 2014 and December�31, 2013 were not significant.

Investments with remaining contractual maturities of five years or less are classified as short-term because the investments are marketable and highly liquid, and we have the ability to utilize them for current operations. Contractual maturities of short-term investments as of September�30, 2014 (in thousands):

�



�	Estimated Fair�Value
Within one year	$	47,671
Between one year and five years	16,277
Total short-term investments	$	63,948

Our equity investment in a publicly traded company as of September 30, 2014 and December�31, 2013 consisted of J-Stream Inc., a Japanese media services company. This equity investment is accounted for as available for sale. In March 2014 we sold a portion of the J-Stream shares we held, resulting in cash proceeds of $2.8 million and a pre-tax gain of $2.4 million.

Items Measured at Fair Value on a Non-recurring Basis

Certain of our assets and liabilities are measured at estimated fair value on a non-recurring basis, using Level 3 inputs. These instruments are subject to fair value adjustments only in certain circumstances (for example, when there is evidence of impairment). During the nine months ended September 30, 2014 and 2013, we did not record any impairments on those assets required to be measured at fair value on a non-recurring basis.

Note 7. Allowance for Doubtful Accounts Receivable and Sales Returns

Activity in the allowance for doubtful accounts receivable and sales returns (in thousands):

�



�	Allowance For
�	Doubtful Accounts Receivable			�	Sales Returns
Balances, December�31, 2013	$	966		�	$	569
Addition (reduction) to allowance	403			�	(185		)
Amounts written off				�	(5		)
Foreign currency translation	(54		)	�	(1		)
Balances, September 30, 2014	$	1,315		�	$	378

One customer accounted for 17% of trade accounts receivable and one other customer accounted for 14% of trade accounts receivable, as of September�30, 2014. One customer accounted for 17% of trade accounts receivable as of December�31, 2013.

One customer accounted for 24% and 20% of consolidated revenue, or $8.2 million and $24.6 million, during the quarter and nine months ended September�30, 2014, and is reflected in our Mobile Entertainment segment. One customer accounted for approximately 12% and 14% of consolidated revenue, or $6.0 million and $21.1 million, during the quarter and nine months ended September 30, 2013, and is reflected in our RealPlayer Group and Games segments. One additional customer accounted for approximately 14%, or $6.8 million, and 11% or $17.3 million, of consolidated revenue during the quarter and nine months ended September 30, 2013, respectively, and is reflected in our Mobile Entertainment segment.

Note 8. Other Intangible Assets

Other intangible assets (in thousands):

�

September 30, 2014

�

December 31, 2013

�

Gross

Amount

�

Accumulated

Amortization

�

Net

�

Gross

Amount

�

Accumulated

Amortization

�

Net

Amortizing intangible assets:

�

Customer relationships

�

34,876

�

32,372

�

2,504

�

35,156

�

31,262

�

3,894

�

Developed technology

�

28,871

�

25,922

�

2,949

�

29,097

�

25,039

�

4,058

�

Patents, trademarks and tradenames

�

3,945

�

3,624

�

321

�

4,021

�

3,627

�

394

�

Service contracts

�

6,426

�

5,746

�

680

�

5,679

�

5,532

�

147

�

74,118

�

67,664

�

6,454

�

73,953

�

65,460

�

8,493

Non-amortizing intangible assets:

�

Trademarks and tradenames

�

4,500

�

4,500

�

4,500

�

4,500

�

Total

�

78,618

�

67,664

�

10,954

�

78,453

�

65,460

�

12,993

In the second quarter of 2014 a small acquisition of a business related to our RealPlayer Group resulted in an intangible asset of $0.8 million being recorded.

No impairments of other intangible assets were recognized in either of the nine months ended September 30, 2014 or 2013.

Note 9. Goodwill

Changes in goodwill (in thousands):

�



Balance, December�31, 2013	$	17,476
Increases due to current year acquisitions	460
Effects of foreign currency translation	(321		)
Balance, September 30, 2014	$	17,615

Goodwill by segment (in thousands):

�



�	September�30, 2014
RealPlayer Group	$	1,003
Mobile Entertainment	2,073
Games	14,539
Total goodwill	$	17,615

In the second quarter of 2014 a small acquisition of a business related to our RealPlayer Group resulted in goodwill of $0.5 million being recorded.

No impairment of goodwill was recognized in either of the nine months ended September 30, 2014 or 2013.

Note 10. Accrued and Other Current Liabilities

Accrued and other current liabilities (in thousands):

�



�	September 30, 2014		�	December 31, 2013
Royalties and other fulfillment costs	$	4,537	�	$	16,467
Employee compensation, commissions and benefits	8,086		�	10,060
Sales, VAT and other taxes payable	6,644		�	7,237
Other	6,618		�	8,129
Total accrued and other current liabilities	$	25,885	�	$	41,893

During the quarter ended March 31, 2014, certain accrued royalty liabilities of $10.6 million associated with our historical music business, which had originally been recorded based on statutory rates, were extinguished.

Note 11. Restructuring Charges

Restructuring and other charges in 2014 and 2013 consist of costs associated with the ongoing reorganization of our business operations and our ongoing expense alignment efforts. The expense amounts in both years relate primarily to severance costs due to workforce reductions.

In the latter half of 2012, we announced the elimination of approximately 160 positions worldwide, which was concluded as of the second quarter of 2013. During 2013 and 2014, we have incurred restructuring charges consisting of costs associated with the reorganization of our business operations and our ongoing expense alignment efforts. These costs are reflected in the table below.

Restructuring charges by type of cost (in thousands):



�	Employee Separation Costs		Asset Related and Other Costs	Total
Costs incurred and charged to expense for the nine months ended September 30, 2014	$	3,805		$	3,805
Costs incurred and charged to expense for the nine months ended September 30, 2013	$	2,891	1,184	$	4,075

Changes to the accrued restructuring cost liability (in thousands):



�	Employee Separation Costs
Accrued liability as of December 31, 2013	$	756
Costs incurred and charged to expense for the nine months ended September 30, 2014	3,805
Cash payments	(3,626		)
Accrued liability at September 30, 2014 (included in Accrued and other current liabilities)	$	935

Note 12. Lease Exit and Related Charges

As a result of the reduction in use of RealNetworks' office space, losses have been recognized representing rent and contractual operating expenses over the remaining life of the leases.

Changes to accrued lease exit and related charges (in thousands):

�



Accrued loss as of December 31, 2013	$	254
Additions and adjustments to the lease exit charges accrual, including sublease income estimate revision	480
Less amounts paid, net of sublease amounts	(611		)
Accrued loss as of September 30, 2014 (included in Accrued and other current liabilities)	$	123



Note�13.	Shareholders Equity

Accumulated Other Comprehensive Income (Loss)

Changes in components of accumulated other comprehensive income (in thousands):



�	�	�	Quarters Ended September 30,							�	Nine Months Ended September 30,
�	�	�	2014			�	2013			�	2014			�	2013
Investments		�	�			�	�			�	�			�	�
�	Accumulated other comprehensive income (loss), beginning of period	�	$	2,784		�	$	27,700		�	$	6,397		�	26,685
�	Unrealized gains (losses), net of tax effects of $0, $587, $0 and $(129)	�	(323		)	�	(1,043		)	�	(1,565		)	�	(28		)
�	Reclassification adjustments for losses (gains) included in other income (expense), net of tax effects of $0, $0, $(4) and $0	�				�				�	(2,371		)	�
�	Net current period other comprehensive income	�	(323		)	�	(1,043		)	�	(3,936		)	�	(28		)
�	Accumulated other comprehensive income (loss) balance, end of period	�	$	2,461		�	$	26,657		�	$	2,461		�	$	26,657
Foreign currency translation		�	�			�	�			�	�			�	�
�	Accumulated other comprehensive income (loss), beginning of period	�	$	(53,901	)	�	$	(54,851	)	�	$	(54,092	)	�	$	(53,225	)
�	Translation adjustments	�	(2,338		)	�	1,235			�	(2,099		)	�	(356		)
�	Reclassification adjustments for losses (gains) included in other income (expense)	�				�				�	(48		)	�	(35		)
�	Net current period other comprehensive income	�	(2,338		)	�	1,235			�	(2,147		)	�	(391		)
�	Accumulated other comprehensive income (loss) balance, end of period	�	$	(56,239	)	�	$	(53,616	)	�	$	(56,239	)	�	$	(53,616	)
Total accumulated other comprehensive income (loss), end of period		�	$	(53,778	)	�	$	(26,959	)	�	$	(53,778	)	�	$	(26,959	)

Note 14. Income Taxes

As of September�30, 2014, there have been no material changes to RealNetworks uncertain tax positions disclosures as provided in Note 14 of the 2013 10-K. We currently anticipate the expiration of the statute of limitations within the next twelve months that may decrease the Company's total unrecognized tax benefit by an amount up to $0.9 million of which $0.4 million could potentially impact tax expense.

We file numerous consolidated and separate income tax returns in the U.S including federal, state and local, as well as foreign jurisdictions. With few exceptions, we are no longer subject to U.S federal income tax examinations for tax years before 2008 or state, local, or foreign income tax examinations for years before 1993. We are currently under audit by various states and foreign jurisdictions for certain tax years subsequent to 1993. We are currently under United States federal audit for the consolidated group (RealNetworks, Inc. and Subsidiaries) for the year ended December 31, 2012.

Note 15. Earnings (Loss) Per Share

Basic net income (loss) per share (EPS) is computed by dividing net income (loss) by the weighted average number of common shares outstanding during the period. Diluted EPS is computed by dividing net income (loss) by the weighted average number of common and dilutive potential common shares outstanding during the period. Basic and diluted EPS (in thousands, except per share amounts):

�



�	Quarters Ended September 30,							�	Nine Months Ended September 30,
�	2014			�	2013			�	2014			�	2013
Net income (loss)	$	(22,178	)	�	$	(31,375	)	�	$	(50,977	)	�	$	(61,520	)
Weighted average common shares outstanding used to compute basic EPS	36,003			�	35,670			�	35,912			�	35,490
Dilutive effect of stock based awards				�				�				�
Weighted average common shares outstanding used to compute diluted EPS	36,003			�	35,670				35,912				35,490
Basic EPS	$	(0.62	)	�	$	(0.88	)	�	$	(1.42	)	�	$	(1.73	)
Diluted EPS	$	(0.62	)	�	$	(0.88	)	�	$	(1.42	)	�	$	(1.73	)

During the quarter and nine months ended September�30, 2014, 6.3 million and 6.2 million shares of common stock, respectively, of potentially issuable shares from stock awards were excluded from the calculation of diluted EPS because of their antidilutive effect.

During the quarter and nine months ended September�30, 2013, 4.6 million and 4.4 million shares of common stock, respectively, of potentially issuable shares from stock awards were excluded from the calculation of diluted EPS because of their antidilutive effect.

Note 16. Commitments and Contingencies

We may become subject to legal proceedings, governmental investigations and claims in the ordinary course of business, including employment claims, contract-related claims, and claims of alleged infringement of third-party patents, trademarks and other intellectual property rights. Such claims, even if not meritorious, could force us to expend significant financial and managerial resources. In addition, given the broad distribution of some of our consumer products, any individual claim related to those products could give rise to liabilities that may be material to us. In the event of a determination adverse to us, we may incur substantial monetary liability, and/or be required to change our business practices. Either of these could have a material adverse effect on our consolidated financial statements. �

Note�17. Guarantees

In the ordinary course of business, RealNetworks is subject to potential obligations for standard warranty and indemnification provisions that are contained within many of our customer license and service agreements. Our warranty provisions are consistent with those prevalent in our industry, and we do not have a history of incurring losses on warranties; therefore, we do not maintain accruals for warranty-related obligations. With regard to indemnification provisions, nearly all of our carrier contracts obligate us to indemnify our carrier customers for certain liabilities that may be incurred by them. We have received in the past, and may receive in the future, claims for indemnification from carrier customers.

In relation to the patents and other technology assets we sold to Intel in the second quarter of 2012, we have specific obligations to indemnify Intel for breaches of the representations and warranties that we made and covenants that we agreed to

in the asset purchase agreement for certain potential future intellectual property infringement claims brought by third parties against Intel. The amount of any potential liabilities related to our indemnification obligations to Intel will not be determined until a claim has been made, but we are obligated to indemnify Intel up to the amount of the gross purchase price that we received in the sale. �

Note 18. Segment Information

We have three reportable segments: (1) RealPlayer Group, which includes sales of our RealPlayer media player software and related products, such as the distribution of third party software products, advertising on RealPlayer websites, and sales of RealPlayer Plus software licenses to consumers, sales of intellectual property licenses, and consumer subscriptions such as SuperPass and our RealPlayer Cloud service; (2)�Mobile Entertainment, which includes our SaaS services, our LISTEN product, and sales of technology licenses of our software products such as Helix; and (3)�Games, which includes all our games-related businesses, including sales of games licenses, online games subscription services, advertising on games sites and social network sites, microtransactions from online and social games, and sales of mobile games.

We allocate certain corporate expenses which are directly attributable to supporting the business to our reportable segments. These corporate expenses include but are not limited to a portion of finance, legal, human resources and headquarters facilities. Remaining expenses, which are not directly attributable to supporting the business, are reported as corporate items. All restructuring, lease exit and related charges, and loss on litigation settlements are included in the corporate segment.

RealNetworks reports three reportable segments based on factors such as how we manage our operations and how our Chief Operating Decision Maker reviews results. Our Chief Operating Decision Maker is considered to be the CEO Staff (CEOS), which includes the Chief Executive Officer, Chief Financial Officer, our Presidents, and General Counsel. The CEOS reviews financial information presented on both a consolidated basis and on a business segment basis. The accounting policies used to derive segment results are the same as those described in Note�1, Description of Business and Summary of Significant Accounting Policies, in the 10-K.

Segment results for the quarters and nine months ended September�30, 2014 and 2013 (in thousands):

RealPlayer Group

�



�	Quarters Ended September 30,							�	Nine Months Ended September 30,
�	2014			�	2013			�	2014			�	2013
Revenue	$	6,565		�	$	17,641		�	$	30,336		�	$	58,407
Cost of revenue	3,566			�	3,264			�	10,704			�	12,984
Gross profit	2,999			�	14,377			�	19,632			�	45,423
Operating expenses	12,392			�	14,449			�	42,668			�	44,656
Operating income (loss)	$	(9,393	)	�	$	(72	)	�	$	(23,036	)	�	$	767

Mobile Entertainment

�



�	Quarters Ended September 30,							�	Nine Months Ended September 30,
�	2014			�	2013			�	2014			�	2013
Revenue	$	19,190		�	$	19,948		�	$	62,285		�	$	59,035
Cost of revenue	12,626			�	11,972			�	38,874			�	33,974
Gross profit	6,564			�	7,976			�	23,411			�	25,061
Operating expenses	7,086			�	9,453			�	26,126			�	26,976
Operating income (loss)	$	(522	)	�	$	(1,477	)	�	$	(2,715	)	�	$	(1,915	)

Games

�



�	Quarters Ended September 30,							�	Nine Months Ended September 30,
�	2014			�	2013			�	2014			�	2013
Revenue	$	8,402		�	$	11,369		�	$	28,085		�	$	38,159
Cost of revenue	2,573			�	3,216			�	8,419			�	10,397
Gross profit	5,829			�	8,153			�	19,666			�	27,762
Operating expenses	8,658			�	11,513			�	27,193			�	35,120
Operating income (loss)	$	(2,829	)	�	$	(3,360	)	�	$	(7,527	)	�	$	(7,358	)

Corporate

�



�	Quarters Ended September 30,							�	Nine Months Ended September 30,
�	2014			�	2013			�	2014			�	2013
Cost of revenue	$	163		�	$	538		�	$	503		�	$	1,660
Extinguishment of liability				�				�	(10,580		)	�
Operating expenses	7,856			�	22,990			�	25,270			�	46,201
Operating income (loss)	$	(8,019	)	�	$	(23,528	)	�	$	(15,193	)	�	$	(47,861	)

Our customers consist primarily of consumers and corporations located in the U.S., Europe, Republic of Korea and various foreign countries (Rest of the world). Revenue by geographic region (in thousands):

�



�	Quarters Ended September 30,					�	Nine Months Ended September 30,
�	2014		�	2013		�	2014		�	2013
United States	$	12,280	�	$	21,039	�	$	47,800	�	$	70,525
Europe	5,749		�	8,750		�	21,129		�	29,278
Republic of Korea	9,728		�	11,839		�	31,114		�	32,062
Rest of the world	6,400		�	7,330		�	20,663		�	23,736
Total net revenue	$	34,157	�	$	48,958	�	$	120,706	�	$	155,601

Long-lived assets (consists of equipment, software, leasehold improvements, other intangible assets, and goodwill) by geographic region (in thousands):

�



�	September�30, 2014		�	December�31, 2013
United States	$	35,375	�	$	40,347
Europe	7,352		�	8,280
Republic of Korea	655		�	936
Rest of the world	3,641		�	4,078
Total long-lived assets	$	47,023	�	$	53,641

Note 19. Related Party Transactions

Transactions with Rhapsody.�See Note 5, Rhapsody Joint Venture, for details on the 2010 restructuring transaction involving Rhapsody. Subsequent to the restructuring transaction, we were obligated to provide Rhapsody with certain support services. These support services, which included information technology and limited operational support provided directly to Rhapsody, were completed in 2013. RealNetworks has no further obligations or liabilities pursuant to the support services agreement.


Item 2.	Managements Discussion and Analysis of Financial Condition and Results of Operations

This Quarterly Report on Form 10-Q and the documents incorporated herein by reference contain forward-looking statements that have been made pursuant to the provisions of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are based on current expectations, estimates, and projections about RealNetworks industry, products, managements beliefs, and certain assumptions made by management. Words such as anticipates, expects, intends, plans, believes, seeks, estimates, and similar expressions are intended to identify forward-looking statements. All statements contained in this report that do not relate to matters of historical fact should be considered forward-looking statements. Forward-looking statements include statements with respect to:


"	the expected benefits and other consequences of our growth plans, strategic initiatives, and restructurings;


"	our expected introduction, and related monetization, of new and enhanced products, services and technologies across our businesses;


"	future revenues, operating expenses, income and other taxes, tax benefits, net income (loss) per diluted share available to common shareholders, acquisition costs and related amortization, and other measures of results of operations;


"	the effects of our past acquisitions and expectations for future acquisitions and divestitures;


"	plans, strategies and expected opportunities for future growth, increased profitability and innovation;


"	the expected financial position, performance, growth and profitability of, and investment in, our businesses and the availability of resources;


"	the effects of legislation, regulations, administrative proceedings, court rulings, settlement negotiations and other factors that may impact our businesses;


"	the continuation and expected nature of certain customer relationships;


"	impacts of competition and certain customer relationships on the future financial performance and growth of our businesses;


"	our involvement in potential claims, legal proceedings and government investigations, and the potential outcomes and effects of such potential claims, legal proceedings and governmental investigations on our business, prospects, financial condition or results of operations;


"	the effects of U.S.�and foreign income and other taxes on our business, prospects, financial condition or results of operations; and


"	the effect of economic and market conditions on our business, prospects, financial condition or results of operations.

These statements are not guarantees of future performance and actual actions or results may differ materially. These statements are subject to certain risks, uncertainties and assumptions that are difficult to predict, including those noted in the documents incorporated herein by reference. Particular attention should also be paid to the cautionary language in Item�1A of Part II entitled Risk Factors. RealNetworks undertakes no obligation to update publicly any forward-looking statements as a result of new information, future events or otherwise, unless required by law. Readers should, however, carefully review the risk factors included in other reports or documents filed by RealNetworks from time to time with the Securities and Exchange Commission, particularly the Quarterly Reports on Form 10-Q and any Current Reports on Form 8-K.

Overview

RealNetworks creates innovative products and services that make it easy to connect with and enjoy digital media. We invented the streaming media category in 1995 and continue to connect consumers with their digital media both directly and through partners, aiming to support every network, device, media type and social network.

We manage our business and report revenue and operating income (loss) in three segments: (1)�RealPlayer Group, (2)�Mobile Entertainment, and (3)�Games. Within our RealPlayer Group, revenue is derived from the sale of our RealPlayer media player software and related products, such as the distribution of third party software products, advertising on RealPlayer websites, and sales of RealPlayer Plus software licenses to consumers, sales of intellectual property licenses, and consumer subscriptions such as SuperPass and our RealPlayer Cloud service. Our Mobile Entertainment business generates revenue from the sale of its SaaS services, which include ringback tones, music on demand, intercarrier messaging, and our LISTEN product, and sales of technology licenses of our software products such as Helix. Our Games business, through its Slingo, GameHouse and Zylom brands, derives revenue from sales of games licenses, online games subscription services, advertising on games sites and social networks, microtransactions within online and social games, and sales of mobile games.

We allocate certain corporate expenses which are directly attributable to supporting our businesses, including but not limited to a portion of finance, legal, human resources and headquarters facilities, to our reportable segments. The allocation of these costs to our business units ensures accountability for financial and operational performance within each of our reportable segments. Our most significant expenses relate to cost of revenue, compensating employees, and selling and marketing our products and services.

For the quarter and nine months ended September�30, 2014, our consolidated revenue declined by $14.8 million and $34.9 million, respectively, compared to the same periods in 2013. The decline in revenue for the quarter in our RealPlayer Group was $11.1 million, $3.0 million in Games and $0.8 million in Mobile Entertainment. For the year to date period, the decline was primarily due to a decline of $28.1 million in our RealPlayer Group and a decline of $10.1 million in Games. For the year to date period, revenue increased by $3.3 million in Mobile Entertainment.

Revenue from our legacy products continues to decline as a result of certain changes in our businesses and market-driven factors. In our RealPlayer Group segment, revenue suffered from pricing pressure and lower distribution in our intellectual property licensing business as well as lower rates, distribution and installations from transitioning to a new partner in our third party software distribution business. Moreover, as we focus more of our distribution and marketing efforts on our new RealPlayer Cloud service, sales of RealPlayer Plus licenses are declining, resulting in reduced revenue. The business also continues to be negatively impacted by a decline in subscribers, attributable solely to our SuperPass product. These changes have also negatively impacted gross margins in the RealPlayer Group, as described in more detail in Segment Operating Results below. In our Games segment, our business continues to be challenged in line with overall trends in the online games market, including the shift from downloadable PC games to social networks and mobile devices. In our Mobile Entertainment segment, the revenue increase in the year-to-date period was related primarily to our music on demand services in Korea and our acquisition of Muzicall in the third quarter of 2013, which increased our direct-to-consumer ringback tones revenue. Partially offsetting these increases was a loss in revenue due to termination of carrier contracts.

Over the past several quarters we have developed a growth plan, implemented strategic initiatives, and executed certain restructuring efforts, all in an effort to grow our businesses, move towards profitability, and streamline our operations. In line with our growth plan, we continue to invest in each of our three business units. During the first half of 2014, we released RealPlayer Cloud worldwide. This global roll out allows us to reach our base of millions of active RealPlayer users around the world. In our Mobile Entertainment business we continue our efforts to roll out our new LISTEN product. LISTEN leverages our pioneering leadership in ringback tones, and our large, global installed base of over 18 million active ringback tone subscribers with more than 20 carriers worldwide, to create a hybrid distribution model that combines partnership with carriers with direct-to-consumer marketing. In our Games business, we launched Slingo Adventure worldwide on Facebook in mid-September and plan to launch the product on mobile platforms worldwide during the fourth quarter of 2014. We expect to continue to invest heavily in our growth initiatives, including further development and marketing efforts around our products. These investments have negatively impacted our recent operating results, which may continue until the expected revenue growth materializes.

During the quarter ended March 31, 2014 certain accrued royalty liabilities of $10.6 million associated with our historical music business, which had originally been recorded based on statutory rates, were extinguished.

Condensed consolidated results of operations were as follows (dollars in thousands):

�



�	Quarters ended September 30, 2014														�	Nine months ended September 30, 2014
�	2014			�	2013			�	$ Change			�	%�Change		�	2014			�	2013			�	$ Change			�	%�Change
Total revenue	$	34,157		�	$	48,958		�	$	(14,801	)	�	(30	)%	�	$	120,706		�	$	155,601		�	$	(34,895	)	�	(22	)%
Cost of revenue	18,928			�	18,990			�	(62		)	�		�%	�	58,500			�	59,015			�	(515		)	�	(1	)%
Extinguishment of liability				�				�				�		�%	�	(10,580		)	�				�	(10,580		)	�	(100	)%
Gross profit	15,229			�	29,968			�	(14,739		)	�	(49	)%	�	72,786			�	96,586			�	(23,800		)	�	(25	)%
Gross margin	45		%	�	61		%	�	�			�	�		�	60		%	�	62		%	�	�			�	�
Operating expenses	35,992			�	58,405			�	(22,413		)	�	(38	)%	�	121,257			�	152,953			�	(31,696		)	�	(21	)%
Operating income (loss)	$	(20,763	)	�	$	(28,437	)	�	$	7,674		�	27	�%	�	$	(48,471	)	�	$	(56,367	)	�	$	7,896		�	(14	)%

In the third quarter of 2014, our total consolidated revenue declined by $14.8 million, compared with the year-earlier period. The reduction in revenue resulted from a decline of $11.1 million in our RealPlayer Group segment, $3.0 million in our Games segment, and $0.8 million in Mobile Entertainment, due to the factors described above. Gross margin decreased to 45% from 61% during the quarter ended September 30, 2014, primarily related to our RealPlayer segment, as described in more detail in Segment Operating Results below. Operating expenses decreased by $22.4 million in the quarter ended September�30, 2014, compared with the prior year, primarily due to a litigation settlement of $11.5 million in the prior year, reduced marketing costs in 2014 of $4.6 million in line with the decrease in our third party distribution revenue and reductions in personnel and related costs of $2.4 million.

For the nine months ended September 30, 2014, our consolidated revenue declined by $34.9 million, compared with the year-earlier period. The reduction in revenue primarily resulted from a decline of $28.1 million in our RealPlayer Group and a decline of $10.1 million in our Games segment, due to the factors described above, partially offset by an increase in Mobile Entertainment revenue of $3.3 million primarily due to an increase in music on demand services in Korea. Gross margin decreased to 60% from 62% for the year-earlier period primarily due to a decline in higher margin revenue. Operating expenses decreased by $31.7 million in the nine months ended September 30, 2014, compared with the prior year, primarily due to a litigation settlement of $11.5 million in the prior year and reduced marketing costs in 2014 of $6.5 million and reductions in personnel and related costs of $7.4 million.

Segment Operating Results

RealPlayer Group

RealPlayer Group segment results of operations were as follows (dollars in thousands):

�



�	Quarters ended September 30, 2014														�	Nine months ended September 30, 2014
�	2014			�	2013			�	$�Change			�	%�Change		�	2014			�	2013			�	$ Change			�	%�Change
Revenue	$	6,565		�	$	17,641		�	$	(11,076	)	�	(63	)%	�	$	30,336		�	$	58,407		�	$	(28,071	)	�	(48	)%
Cost of revenue	3,566			�	3,264			�	302			�	9	�%	�	10,704			�	12,984			�	(2,280		)	�	(18	)%
Gross profit	2,999			�	14,377			�	(11,378		)	�	(79	)%	�	19,632			�	45,423			�	(25,791		)	�	(57	)%
Gross margin	46		%	�	81		%	�	�			�	�		�	65		%	�	78		%	�	�			�	�
Operating expenses	12,392			�	14,449			�	(2,057		)	�	(14	)%	�	42,668			�	44,656			�	(1,988		)	�	(4	)%
Operating income (loss)	$	(9,393	)	�	$	(72	)	�	$	(9,321	)	�		�%	�	$	(23,036	)	�	$	767		�	$	(23,803	)	�		�%

Total RealPlayer Group revenue decreased by $11.1 million in the quarter ended September 30, 2014, compared with the year-earlier period. This decrease was primarily a result of our transition to a new third party distribution partner, which resulted in lower rates, decreased distribution and decreased installations compared to our previous partner resulting in a decrease of $5.4 million in our third party distribution revenue. In addition, lower distribution of intellectual property licenses decreased revenue by $2.0 million. Further contributing to the decline was a decrease in RealPlayer Plus license revenue of $1.8 million due to our focus on increasing RealPlayer Cloud subscriptions.

Total RealPlayer Group revenue decreased by $28.1 million in the nine months ended September 30, 2014, compared with the year-earlier period. This decrease was primarily a result of reduced rates that caused a decrease in our third party distribution revenue by $11.2 million and lower subscriptions revenue of $4.7 million due to fewer subscribers, attributable solely to our SuperPass product. Further contributing to the decline was a decrease in RealPlayer license revenue of $5.3 million due to our focus on increasing RealPlayer Cloud subscriptions and a decrease of $4.7 million in distribution of intellectual property licenses.

Cost of revenue decreased by $2.3 million during the nine months ended September 30, 2014, compared with the year-earlier period. Costs related to our RealPlayer Plus licensing business decreased by $1.2 million due to lower license royalties. Costs related to our subscription business declined $1.0 million in connection with lower subscription revenue.

Gross margin during the quarter ended September 30, 2014 declined primarily as a result of our transition to a new third party distribution partner at significantly lower rates compared to our previous partner. Although gross margins will be lower on the revenue derived under our new third party distribution arrangement, we expect that our marketing costs related to this business will decline as well.

Operating expenses decreased by $2.1 million and $2.0 million, respectively, in the quarter and nine months ended September�30, 2014, compared with the year-earlier period primarily due to decreased marketing spend related to our third party distribution arrangements.

Mobile Entertainment

Mobile Entertainment segment results of operations were as follows (dollars in thousands):�



�	Quarters ended September 30, 2014														�	Nine months ended September 30, 2014
�	2014			�	2013			�	$�Change			�	%�Change		�	2014			�	2013			�	$�Change			�	%�Change
Revenue	$	19,190		�	$	19,948		�	$	(758	)	�	(4	)%	�	$	62,285		�	$	59,035		�	$	3,250		�	6	�%
Cost of revenue	12,626			�	11,972			�	654			�	5	�%	�	38,874			�	33,974			�	4,900			�	14	�%
Gross profit	6,564			�	7,976			�	(1,412		)	�	(18	)%	�	23,411			�	25,061			�	(1,650		)	�	(7	)%
Gross margin	34		%	�	40		%	�	�			�	�		�	38		%	�	42		%	�	�			�	�
Operating expenses	7,086			�	9,453			�	(2,367		)	�	(25	)%	�	26,126			�	26,976			�	(850		)	�	(3	)%
Operating income (loss)	$	(522	)	�	$	(1,477	)	�	$	955		�	65	�%	�	$	(2,715	)	�	$	(1,915	)	�	$	(800	)	�	(42	)%

Total Mobile Entertainment revenue decreased by $0.8 million in the quarter ended September 30, 2014, compared with the year-earlier period. A decrease of $2.2 million was primarily due to discounts in our ringback tones business, the termination of our carrier application services in Asia and a decrease in our direct to consumer business that was part of our Muzicall acquisition in 2013. Partially offsetting this decrease was an increase in music on demand revenue of $1.4 million in our Korea business.

Total Mobile Entertainment revenue increased by $3.3 million in the nine months ended September 30, 2014, compared with the year-earlier period. The increase was primarily due to an increase of $6.7 million in music on demand revenue in Korea and an increase of $1.7 million in our direct to consumer ringback tones business due to our Muzicall acquisition. Partially offsetting this increase was a decrease of $2.7 million due to termination of carrier contracts, in addition to slower growth in our ringback tones business of $0.7 million and $1.5 million related to the termination of our video on demand service in 2013.

Cost of revenue increased by $0.7 million and $4.9 million in the quarter and nine months ended September�30, 2014, respectively, compared with the year-earlier periods, primarily due to an increase in label royalties related to our music on demand services. ��This is partially offset by a decrease of $0.5 million and $1.6 million in the quarter and nine months ended September�30, 2014, respectively, from our integrated music project.

Gross margin declined for the quarter and nine months ended September�30, 2014, due to a decline in higher margin revenues.

Operating expenses decreased by $2.4 million for the quarter ended September 30, 2014, compared with the year-earlier period, primarily due to savings of $1.1 million in marketing related expenses and a decrease of $0.8 million due to reductions in personnel and related costs.

Games

Games segment results of operations were as follows (dollars in thousands):

�



�	Quarters ended September 30, 2014														�	Nine months ended September 30, 2014
�	2014			�	2013			�	$�Change			�	%�Change		�	2014			�	2013			�	$�Change			�	%�Change
Revenue	$	8,402		�	$	11,369		�	$	(2,967	)	�	(26	)%	�	$	28,085		�	$	38,159		�	$	(10,074	)	�	(26	)%
Cost of revenue	2,573			�	3,216			�	(643		)	�	(20	)%	�	8,419			�	10,397			�	(1,978		)	�	(19	)%
Gross profit	5,829			�	8,153			�	(2,324		)	�	(29	)%	�	19,666			�	27,762			�	(8,096		)	�	(29	)%
Gross margin	69		%	�	72		%	�	�			�	�		�	70		%	�	73		%	�	�			�	�
Operating expenses	8,658			�	11,513			�	(2,855		)	�	(25	)%	�	27,193			�	35,120			�	(7,927		)	�	(23	)%
Operating income (loss)	$	(2,829	)	�	$	(3,360	)	�	$	531		�	16	�%	�	$	(7,527	)	�	$	(7,358	)	�	$	(169	)	�	(2	)%

Total Games revenue decreased by $3.0 million in the quarter ended September 30, 2014, compared with the year-earlier period. Lower revenue from our subscription products, licensing and advertising due to continued declines in our storefront and subscription businesses contributed $1.4 million, $0.4 million and $0.8 million, respectively, to the overall decrease.

Total Games revenue decreased by $10.1 million in the nine months ended September 30, 2014, compared with the year-earlier period. Lower revenue from our subscription products, licensing and advertising due to continued declines in our storefront and subscription businesses contributed $4.0 million, $2.5 million and $2.7 million, respectively, to the overall decrease.

Cost of revenue decreased by $0.6 million and $2.0 million in the quarter and nine months ended September�30, 2014, respectively, compared with the year-earlier period. The decreases were due to the decrease in partner royalties expense, which

has a direct correlation with the decrease in Games revenue. The decrease in cost of revenue was also due to a decline in our advertising business. Gross margin declined during the quarter and nine months ended September�30, 2014 to 69% from 72% and to 70% from 73%, respectively, due primarily to a higher proportion of lower margin revenue in the current year.

Operating expenses declined by $2.9 million in the quarter ended September 30, 2014, compared with the year-earlier period. The decrease was due to reductions in personnel and related costs of $1.1 million and reduced marketing spend of $1.4 million.

Operating expenses declined by $7.9 million in the nine months ended September 30, 2014, compared with the year-earlier period. The decrease was due to reductions in personnel and related costs of $2.4 million and reduced marketing spend of $3.7 million.

Corporate

We allocate certain corporate expenses which are directly attributable to supporting the business to our reportable segments. These allocated corporate expenses include but are not limited to a portion of finance, legal, human resources and headquarters facilities. Remaining expenses, which are not directly attributable to supporting the business, are reported as corporate items. All restructuring, and lease exit and related charges, are included in the corporate segment.

Corporate segment results of operations were as follows (dollars in thousands):

�



�	Quarters ended September 30, 2014														�	Nine months ended September 30, 2014
�	2014			�	2013			�	$�Change			�	%�Change		�	2014			�	2013			�	$�Change			�	%�Change
Cost of revenue	$	163		�	$	538		�	$	(375	)	�	(70	)%	�	$	503		�	$	1,660		�	$	(1,157	)	�	(70	)%
Extinguishment of liability				�				�				�		�%	�	(10,580		)	�				�	(10,580		)	�	(100	)%
Operating expenses	7,856			�	22,990			�	(15,134		)	�	(66	)%	�	25,270			�	46,201			�	(20,931		)	�	(45	)%
Operating income (loss)	$	(8,019	)	�	$	(23,528	)	�	$	15,509		�	66	�%	�	$	(15,193	)	�	$	(47,861	)	�	$	32,668		�	68	�%

Operating expenses decreased by $15.1 million in the quarter ended September 30, 2014 compared with the year-earlier period. The decrease was primarily due to a litigation settlement of $11.5 million in the prior year and $2.1 million in savings from the relocation of our Seattle headquarters.

Operating expenses decreased by $20.9 million in the nine months ended September 30, 2014, compared with the year-earlier period. The decrease was primarily due to a litigation settlement of $11.5 million in the prior year and $2.4 million of reduced expense for lease exit charges. An additional savings of $4.0 million resulted from the relocation of our Seattle headquarters.

Consolidated Operating Expenses

Our operating expenses consist primarily of salaries and related personnel costs including stock based compensation, consulting fees associated with product development, sales commissions, amortization of certain intangible assets capitalized in our acquisitions, professional service fees, advertising costs, and restructuring charges. Operating expenses were as follows (dollars in thousands):

�



�	Quarters ended September 30, 2014												�	Nine months ended September 30, 2014
�	2014		�	2013		�	$�Change			�	%�Change		�	2014		�	2013		�	$ Change			�	%�Change
Research and development	$	12,784	�	$	15,707	�	$	(2,923	)	�	(19	)%	�	$	40,110	�	$	45,951	�	$	(5,841	)	�	(13	)%
Sales and marketing	13,283		�	19,427		�	(6,144		)	�	(32	)%	�	51,022		�	59,830		�	(8,808		)	�	(15	)%
General and administrative	7,723		�	9,869		�	(2,146		)	�	(22	)%	�	25,617		�	28,506		�	(2,889		)	�	(10	)%
Restructuring and other charges	2,048		�	1,877		�	171			�	9	�%	�	3,805		�	4,075		�	(270		)	�	(7	)%
Lease exit and related charges	154		�			�	154			�			�	703		�	3,066		�	(2,363		)	�	(77	)%
Loss on litigation settlements			�	11,525		�	(11,525		)	�	100	�%	�			�	11,525		�	(11,525		)	�	100	�%
Total consolidated operating expenses	$	35,992	�	$	58,405	�	$	(22,413	)	�	(38	)%	�	$	121,257	�	$	152,953	�	$	(31,696	)	�	(21	)%

Research and development expenses decreased by $2.9 million and $5.8 million, respectively, in the quarter and nine months ended September�30, 2014, compared with the year-earlier period. The decrease was primarily due to savings resulting from the relocation of our Seattle headquarters of $1.5 million and $3.8 million, respectively.

Sales and marketing expenses decreased by $6.1 million in the quarter ended September 30, 2014, compared with the year-earlier period. The decrease was primarily due to reduced marketing spend of $4.6 million and $0.9 million in reduced personnel and related costs.

Sales and marketing expenses decreased by $8.8 million in the nine months ended September 30, 2014, compared with the year-earlier period. The decrease was primarily due to reduced marketing spend of $6.5 million and $1.5 million from the relocation of our Seattle headquarters.

General and administrative expenses decreased by $2.1 million in the quarter ended September 30, 2014, compared with the year-earlier period. The decrease was primarily due to higher legal fees related to litigation in the prior year and tax refunds.

General and administrative expenses decreased by $2.9 million in the nine months ended September 30, 2014, compared with the year-earlier period. The decrease was primarily due to $1.8 million in higher legal fees related to ligation in the prior year.

Restructuring and other charges and Lease exit and related charges consist of costs associated with the ongoing reorganization of our business operations and our ongoing expense alignment efforts. The restructuring expense amounts in both years primarily related to severance costs due to workforce reductions. For additional details on these charges see Note 11, Restructuring Charges and Note 12, Lease Exit and Related Charges.

Other Income (Expenses)

Other income (expenses), net was as follows (dollars in thousands):

�



�	Quarters ended September 30, 2014														�	Nine months ended September 30, 2014
�	2014			�	2013			�	$�Change			�	%�Change		�	2014			�	2013			�	$�Change			�	%�Change
Interest income, net	$	80		�	$	166		�	$	(86	)	�	(52	)%	�	$	396		�	$	992		�	$	(596	)	�	(60	)%
Gain (loss) on sale of available for sale securities, net				�				�				�			�	2,371			�				�	2,371			�	100	�%
Equity in net loss of Rhapsody	(1,530		)	�	(2,629		)	�	1,099			�	42	�%	�	(4,170		)	�	(6,209		)	�	2,039			�	33	�%
Other income (expense), net	325			�	(118		)	�	443			�	375	�%	�	153			�	(146		)	�	299			�	205	�%
Total other income (expense), net	$	(1,125	)	�	$	(2,581	)	�	$	1,456		�	56	�%	�	$	(1,250	)	�	$	(5,363	)	�	$	4,113		�	77	�%

As described further in Note 5, Rhapsody Joint Venture, we account for our investment in Rhapsody under the equity method of accounting. The net carrying value of our investment in Rhapsody is not necessarily indicative of the underlying fair value of our investment.

The increase in Other income (expense), net, of $4.1 million for the nine months ended September 30, 2014 was primarily due to the $2.4 million gain on sale of a portion of our shares held in J-Stream, as discussed further in Note 6, Fair Value Measurements, as well as our lower recorded net loss associated with our investment in Rhapsody.

Income Taxes

During the quarters ended September�30, 2014 and 2013, we recognized income tax expense of $0.3 million and $0.4 million, respectively, related to U.S. and foreign income taxes.

During the nine months ended September 30, 2014 and 2013, we recognized income tax expense of $1.3 million and an income tax benefit of $0.2 million, respectively, related to U.S. and foreign income taxes. The change in income tax expense during the quarter and nine months ended September�30, 2014 was largely the result of an income tax benefit related to the acquisition of Slingo, Inc. recognized in the quarter ending September 30, 2013 and changes in our jurisdictional income.

months that may decrease the Company's total unrecognized tax benefit by an amount up to $0.9 million of which $0.4 million could potentially impact tax expense.

The majority of our tax expense is due to income in our foreign jurisdictions and we have not benefitted from losses in the U.S. and certain foreign jurisdictions in the third quarter of 2014. We generate income in a number of foreign jurisdictions, some of which have higher or lower tax rates relative to the U.S. federal statutory rate. Our tax expense could fluctuate significantly on a quarterly basis to the extent income is less than anticipated in countries with lower statutory tax rates and more than anticipated in countries with higher statutory tax rates. For the quarters ended September�30, 2014, decreases in tax expense from income generated in foreign jurisdictions with lower tax rates in comparison to the U.S. federal statutory rate was offset by increases in tax expense from income generated in foreign jurisdictions having comparable, or higher tax rates in comparison to the U.S. federal statutory rate. As such, the effect of differences in foreign tax rates on the Company's tax expense for the third quarter of 2014 is minimal.

As of September�30, 2014, we have not provided for U.S. federal and state income taxes on certain undistributed earnings of our foreign subsidiaries, since such earnings are considered indefinitely reinvested outside the U.S. or may be remitted tax-free to the U.S. If these amounts were distributed to the U.S., in the future in the form of dividends or otherwise, we could be subject to additional U.S. income and foreign withholding taxes. It is not practicable to determine the foreign withholding and U.S. income tax liability or benefit on such earnings due to the timing of such future distributions, the availability of foreign tax credits, and the complexity of the computation if such earnings were not deemed to be permanently reinvested. If future events, including material changes in estimates of cash, working capital, and long-term investment requirements necessitate that these earnings be distributed, an additional provision for U.S. income and foreign withholding taxes, net of foreign tax credits, may be necessary.

We file numerous consolidated and separate income tax returns in the U.S., including federal, state and local returns, as well as in foreign jurisdictions. With few exceptions, we are no longer subject to United States federal income tax examinations for tax years prior to 2008 or state, local or foreign income tax examinations for years prior to 1993. We are currently under audit by various states and foreign jurisdictions for certain tax years subsequent to 1993. We are currently under United States federal audit for the consolidated group (RealNetworks, Inc. and Subsidiaries) for the year ended December 31, 2012.

Geographic Revenue

Revenue by geographic region was as follows (dollars in thousands):

�



�	Quarters ended September 30, 2014												�	Nine months ended September 30, 2014
�	2014		�	2013		�	$�Change			�	%�Change		�	2014		�	2013		�	$ Change			�	%�Change
United States	$	12,280	�	$	21,039	�	$	(8,759	)	�	(42	)%	�	$	47,800	�	$	70,525	�	$	(22,725	)	�	(32	)%
Europe	5,749		�	8,750		�	(3,001		)	�	(34	)%	�	21,129		�	29,278		�	(8,149		)	�	(28	)%
Republic of Korea	9,728		�	11,839		�	(2,111		)	�	(18	)%	�	31,114		�	32,062		�	(948		)	�	(3	)%
Rest of world	6,400		�	7,330		�	(930		)	�	(13	)%	�	20,663		�	23,736		�	(3,073		)	�	(13	)%
Total net revenue	$	34,157	�	$	48,958	�	$	(14,801	)	�	(30	)%	�	$	120,706	�	$	155,601	�	$	(34,895	)	�	(22	)%

Revenue in the United States declined by $8.8 million in the quarter ended September�30, 2014, compared with the year-earlier period. The decline was due primarily to lower revenue generated from the distribution of third party software products of $4.9 million, lower revenue generated from our games business of $1.3 million, lower revenue from our SuperPass subscription revenue of $1.0 million and a decline in our RealPlayer Plus license revenue of $0.7 million.

Revenue in the United States declined by $22.7 million in the nine months ended September 30, 2014, compared with the year-ago period. The decline was due primarily to lower revenue generated from the distribution of third party software products of $10.2 million, a decline in our SuperPass subscription revenue of $4.0 million, a decrease in our games revenue of $3.8 million, a decrease in our RealPlayer Plus license revenue of $2.7 million and a decline in SaaS revenue of $1.5 million.

Revenue in Europe declined by $3.0 million in the quarter ended September�30, 2014, compared with the year-earlier period. The decrease was primarily due to lower revenue from our Games business of $1.7 million, lower revenue from RealPlayer Plus licenses of $0.5 million, a decline in third party software distribution revenue of $0.5 million as well a decline in our SaaS revenue of $0.3 million.

Revenue in Europe declined by $8.1 million in the nine months ended September 30, 2014, compared with the year-ago period. The decline was due primarily to a decrease in revenue from our Games business of $6.1 million, a decrease in RealPlayer Plus license revenue of $1.5 million, offset in part by an increase in SaaS revenue of $0.7 million.

Revenue in Korea decreased $2.1 million in the quarter ended September�30, 2014 , compared with the year-earlier period. The decrease was primarily due to lower intellectual property license revenue of $2.6 million and lower revenue from our SaaS offerings (excluding music on demand) of $0.9 million, including ringback tones revenue partially offset by higher music on demand revenue of $1.5 million.

Revenue in Korea decreased $0.9 million in the nine months ended September 30, 2014, compared with the year-ago period. The decrease was mainly due to lower intellectual property license revenue of $5.3 million and lower revenue from our SaaS offerings (excluding music on demand) of $2.6 million, including ringback tones revenue partially offset by higher music on demand revenue of $7.4 million.

Revenue in the rest of world decreased by $0.9 million in the quarter ended September 30, 2014, compared with the year-earlier period. The decrease was primarily due to lower revenue from our RealPlayer Plus licenses of $0.6 million, a decrease in our third party distribution revenue of $0.3 million and a decrease in our mobile entertainment revenue of $0.3 million. These decreases were partially offset by an increase in our intellectual property license revenue of $0.5 million.

Revenue in the rest of world decreased by $3.1 million in the nine months ended September 30, 2014, compared with the year-ago period. The decrease was due to lower revenue from our RealPlayer Plus licenses of $1.9 million, $1.3 million from SaaS revenue, and $1.0 million from our subscription revenue. These decreases were partially offset by an increase in system integration services in Japan of $1.3 million.

New Accounting Pronouncements

See Note 2, Recent Accounting Pronouncements.

Liquidity and Capital Resources

The following summarizes working capital, cash, cash equivalents, short-term investments, and restricted cash (in thousands):

�



�	September 30, 2014		�	December 31, 2013
Working capital	$	153,685	�	$	191,522
Cash, cash equivalents, and short-term investments	178,021		�	226,155
Restricted cash equivalents and investments	3,000		�	3,000

The 2014 decrease of cash, cash equivalents, and short-term investments from December 31, 2013 was primarily due to cash used in operating activities of $(45.6) million in the first nine months of 2014.

The following summarizes cash flow activity (in thousands):

�



�	Nine Months Ended September 30,
�	2014			�	2013
Cash provided by (used in) operating activities	$	(45,642	)	�	$	(28,303	)
Cash provided by (used in) investing activities	10,472			�	1,411
Cash provided by (used in) financing activities	(458		)	�	(1,331		)

Cash used in operating activities consisted of net income (loss) adjusted for certain non-cash items such as depreciation and amortization, and the effect of changes in certain operating assets and liabilities.

Cash used in operating activities was $17.3 million more in the nine months ended September 30, 2014, as compared to the same period in 2013. This increase was primarily due to the decline in revenue of $34.9 million for the nine months ended September�30, 2014 compared with the prior year period, which was only partially offset by a decline in cash operating expenses.

For the nine months ended September 30, 2014, cash provided by investing activities of $10.5 million was primarily due to sales and maturities, net of purchases, of short-term investments of $11.0 million and cash proceeds received from the sale of available for sale securities during the first quarter of $2.8 million, partially offset by purchases of equipment, software and leasehold improvements of $2.1 million.

For the nine months ended September 30, 2013, cash provided by investing activities of $1.4 million was primarily due to net cash received of $24.7 million from the sales, maturity and purchases of short-term investments. Partially offsetting these proceeds was a cash outlay of $22.5 million for the acquisitions of businesses, net of cash acquired.

Financing activities for the nine months ended September 30, 2014 used cash totaling $0.5 million primarily from the payment of the principal amount of contingent consideration of $0.7 million related to an earlier period business acquisition.

Financing activities for the nine months ended September 30, 2013 used cash totaling $1.3 million primarily from certain tax payments from shares withheld upon the vesting of employee restricted stock of $0.9 million as well as the payment of the principal amount of contingent consideration of $0.8 million related to an earlier period business acquisition.

We currently have no planned significant capital expenditures for the remainder of 2014 other than those in the ordinary course of business.

Our principal future cash commitments include office leases. We believe that our current cash, cash equivalents, and short-term investments will be sufficient to meet our anticipated cash needs for working capital and capital expenditures for at least the next 12�months.

In the future, we may seek to raise additional funds through public or private equity financing, or through other sources such as credit facilities. The sale of additional equity securities could result in dilution to our shareholders. In addition, in the future, we may enter into cash or stock acquisition transactions or other strategic transactions that could reduce cash available to fund our operations or result in dilution to shareholders.

Our cash equivalents and short-term investments consist of investment grade securities, as specified in our investment policy guidelines. The policy limits the amount of credit exposure to any one non-U.S. Government or non-U.S. Agency issue or issuer to a maximum of 5% of the total portfolio. These securities are subject to interest rate risk and will decrease in value if interest rates increase. Because we have historically had the ability to hold our fixed income investments until maturity, we do not expect our operating results or cash flows to be significantly affected by a sudden change in market interest rates in our securities portfolio.

We conduct our operations primarily in five functional currencies: the U.S. dollar, the Korean won, the Japanese yen, the British pound and the euro. We currently do not hedge the majority of our foreign currency exposures and are therefore subject to the risk of exchange rate fluctuations. We invoice our international customers primarily in U.S. dollars, except for certain countries where we invoice our customers primarily in the respective foreign currencies. We are exposed to foreign exchange rate fluctuations as the financial results of foreign subsidiaries are translated into U.S. dollars in consolidation. Our exposure to foreign exchange rate fluctuations also arises from intercompany payables and receivables to and from our foreign subsidiaries.

As of September�30, 2014, approximately $24.1 million of the $178.0 million of cash, cash equivalents, and short-term investments was held by our foreign subsidiaries. If these funds are needed for our operations in the U.S., we may be required to accrue and pay U.S. income and foreign withholding taxes to repatriate these funds. However, our intent is to permanently reinvest these funds outside of the U.S. and our current plans do not demonstrate a need to repatriate them to fund our U.S. operations. Additionally, the Company currently has significant net operating losses and other tax attributes that could be used to offset potential U.S. income tax that could result if these amounts were distributed to the U.S. We utilize a variety of tax planning and financing strategies in an effort to ensure that our worldwide cash is available in the locations in which it is needed. We do not expect restrictions or potential taxes on repatriation of amounts held outside of the U.S to have a material effect on our overall liquidity, financial condition or results of operations.

As of September�30, 2014, we have not provided for U.S. federal and state income taxes on certain undistributed earnings of our foreign subsidiaries, since such earnings are considered indefinitely reinvested outside the U.S. or may be remitted tax-free to the U.S. If these amounts were distributed to the U.S., in the future in the form of dividends or otherwise, we could be subject to additional U.S. income and foreign withholding taxes. It is not practicable to determine the foreign withholding and U.S. income tax liability or benefit on such earnings due to the timing of such future distributions, the availability of foreign tax credits, other tax attributes, and the complexity of the computation if such earnings were not deemed to be permanently reinvested. If future events, including material changes in estimates of cash, working capital, and long-term investment requirements necessitate that these earnings be repatriated, an additional provision for U.S. income and foreign withholding taxes, net of foreign tax credits, may be necessary.

Off-Balance Sheet Arrangements

We have operating lease obligations for office facility leases with future cash commitments that are not required to be recorded on our consolidated balance sheet. Accordingly, these operating lease obligations constitute off-balance sheet

arrangements. In addition, since we do not maintain accruals associated with certain guarantees, as discussed in Note 17, Guarantees, those guarantee obligations also constitute off-balance sheet arrangements.

Critical Accounting Policies and Estimates

The preparation of our financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reported period. Our critical accounting policies and estimates are as follows:


"	Revenue recognition;


"	Estimating music publishing rights and music royalty accruals;


"	Estimating recoverability of deferred costs;


"	Estimating allowances for doubtful accounts and sales returns;


"	Valuation of equity method investments;


"	Valuation of definite-lived assets;


"	Valuation of goodwill and indefinite-lived intangible assets;


"	Stock-based compensation; and


"	Accounting for income taxes.

Revenue Recognition.�We recognize revenue when persuasive evidence of an arrangement exists, delivery has occurred, the sales price is fixed or determinable, and collection is probable. Physical products are considered delivered to the customer once they have been shipped and title and risk of loss have been transferred. For online sales, the products or services are considered delivered at the time the product or services are made available, digitally, to the end user.

We recognize revenue on a gross or net basis. In most arrangements, we contract directly with end user customers, and are the primary obligor. In such arrangements, we recognize revenue on a gross basis. In some cases, we utilize third-party distributors who are the primary obligor to sell products or services directly to end user customers. In such instances, we recognize revenue on a net basis.

In our direct to consumer business segments, we derive revenue primarily through (1)�subscriptions of SuperPass within our RealPlayer Group segment and subscriptions sold by our Games segment, (2)�sales of content downloads, software and licenses offered by our RealPlayer Group, Mobile Entertainment, and Games segments and (3)�the sale of advertising and the distribution of third-party products on our websites and in our games.

Consumer subscription products are paid in advance, typically for monthly, quarterly or annual duration. Subscription revenue is recognized ratably over the related subscription time period. Revenue from sales of content downloads, software and licenses is recognized at the time the product is made available, digitally, to the end user. Revenue generated from advertising on our websites and from advertising and the distribution of third-party products included in our products is recognized as revenue at the time of delivery.

We also generate revenue through business-to-business channels by providing services within our Mobile Entertainment segment enabling mobile carriers to deliver audio and video content to their customers and by selling software licenses and products and related support and other services. Revenue generated from services provided to mobile carriers that enable the delivery of audio and video content to their customers is recognized as the services are provided. Setup fees to build these services are recognized ratably upon launch of the service over the remaining expected term of the service.

Non-software revenue arrangements containing multiple elements are divided into separate units of accounting, after being evaluated for specific criteria. If the criteria for separation are met, revenue is allocated to the individual units using the relative price method. If the criteria are not met, the elements are treated as one unit of accounting and revenue recognition is delayed until all elements have been delivered. In the case of revenue arrangements containing software, elements are divided into separate units of accounting only when vendor-specific objective evidence has been established. In cases where vendor-specific objective evidence has not been established, undelivered elements are combined into one unit of accounting and are not recognized in revenue until all elements have been delivered.

Estimating Music Publishing Rights and Music Royalty Accruals.�We must make estimates of amounts that may be owed related to music royalties for our domestic and international music services, primarily the Rhapsody music service which was separated from our operating results beginning April�1, 2010. Material differences may impact the amount and timing of our expense for any period if management made different judgments or utilized different estimates. Under copyright law, we may be required to pay licensing fees for digital sound recordings and compositions we deliver. Copyright law generally does not specify the rate and terms of the licenses, which are determined by voluntary negotiations among the parties or, for certain compulsory licenses where voluntary negotiations are unsuccessful, by arbitration. There are certain geographies and agencies for which we have not completed negotiations with regard to the royalty rate to be applied to the historic sales of our digital music offerings. Our estimates are based on contracted or statutory rates, when established, or managements best estimates

based on facts and circumstances regarding the specific music services and agreements in similar geographies or with similar agencies. While we base our estimates on historical experience and on various other assumptions that management believes to be reasonable under the circumstances, actual results may differ materially from these estimates under different assumptions or conditions.

Estimating Recoverability of Deferred Costs.�We defer costs on projects for service revenue and system sales. Deferred costs consist primarily of direct and incremental costs to customize and install systems, as defined in individual customer contracts, including costs to acquire hardware and software from third parties and payroll costs for our employees and other third parties. We recognize such costs as a component of cost of revenue, the timing of which is dependent upon the revenue recognition policy by contract. For revenue recognized under the completed contract method, costs are deferred until the products are delivered, or upon completion of services or, where applicable, customer acceptance. For revenue recognized under the percentage of completion method, costs are recognized as products are delivered or services are provided in accordance with the percentage of completion calculation. For revenue recognized ratably over the term of the contract, costs are recognized ratably over the term of the contract, commencing on the date of revenue recognition. At each balance sheet date, we review deferred costs to ensure they are ultimately recoverable. Any anticipated losses on uncompleted contracts are recognized when evidence indicates the estimated total cost of a contract exceeds its estimated total revenue.

Assessing the recoverability of deferred project costs is based on significant assumptions and estimates, including future revenue and cost of sales. Significant or sustained decreases in revenue or increases in cost of sales in future periods could result in impairments of deferred project costs. We cannot accurately predict the amount and timing of any such impairments. Should the value of deferred project costs become impaired, we would record the appropriate charge, which could have a material adverse effect on our financial condition or results of operations.

Estimating Allowances for Doubtful Accounts and Sales Returns.�We make estimates of the uncollectible portion of our accounts receivable. We specifically analyze the age of accounts receivable and historical bad debts, customer credit-worthiness and current economic trends when evaluating the adequacy of the allowance for doubtful accounts. Similarly, we make estimates of potential future product returns related to current period revenue. We analyze historical returns, current economic trends, and changes in customer demand and acceptance of our products when evaluating the adequacy of the sales returns allowance. Significant judgments and estimates are made and used in connection with establishing allowances for doubtful accounts and sales returns. Material differences may result in the amount and timing of our revenue for any period if we were to make different judgments or utilize different estimates or actual future experience was different from the judgments and estimates.

Valuation of Equity Method Investments.�We use the equity method of accounting for investments in circumstances where we have the ability to exert significant influence, but not control, over an investee or joint venture. We initially record our investment based on a fair value analysis of the investment.

We record our percentage interest in the investee's recorded income or loss and changes in the investee's capital under this method, which will increase or decrease the reported value of our investment. We record investee losses up to the aggregate amount of the investment. See Note 5 Rhapsody Joint Venture for a discussion of the $10.0 million preference on the convertible preferred stock we hold in Rhapsody and its impact on our equity method of accounting for this investment,

We evaluate impairment of an investment valued under the equity method if events and circumstances warrant. An impairment charge would be recorded if a decline in value of an equity investment below its carrying amount were determined to be other than temporary. In determining if a decline is other than temporary, we consider factors such as the length of time and extent to which the fair value of the investment has been less than the carrying amount of the investee or joint venture, the near-term and longer-term operating and financial prospects of the investee or joint venture and our intent and ability to hold the investment for a period of time sufficient to allow for any anticipated recovery.

Valuation of Definite-Lived Assets.�Definite-lived assets consist primarily of property, plant and equipment, as well as amortizable intangible assets acquired in business combinations. Definite-lived assets are depreciated or amortized on a straight line basis over their estimated useful lives. We review definite-lived assets for impairment whenever events or changes in circumstances indicate the carrying amount of such assets may not be recoverable. Recoverability of these assets is measured by comparison of their carrying amount to future undiscounted cash flows the assets are expected to generate. If definite-lived assets are considered to be impaired, the impairment to be recognized equals the amount by which the carrying value of the assets exceeds their fair market value.

The impairment analysis of definite-lived assets is based upon estimates and assumptions relating to our future revenue, cash flows, operating expenses, costs of capital and capital purchases. These estimates and assumptions are complex and subject to a significant degree of judgment with respect to certain factors including, but not limited to, the estimation of the related future revenues, the cash flows of our long-term operating plans, valuation multiples, market and interest rate risk, and risk-commensurate discount rates and cost of capital. Significant or sustained declines in future revenue or cash flows, or

adverse changes in our business climate, among other factors, and their resulting impact on the estimates and assumptions relating to the value of our definite-lived assets could result in the need to perform an impairment analysis in future periods which could result in a significant impairment. While we believe our estimates and assumptions are reasonable, due to their complexity and subjectivity, these estimates and assumptions could vary from period to period. Changes in these estimates and assumptions could materially affect the estimate of future undiscounted cash flows and related fair market values of these assets and result in significant impairments, which could have a material adverse effect on our financial condition or results of operations.

As of September 30, 2014, we had approximately $10 million and $8 million in total carrying value of definite-lived assets related to our Mobile Entertainment and our RealPlayer groups, respectively. In accordance with our policy as described above, we reviewed these assets for impairment as of September 30, 2014. Our estimate of the fair value of these asset groups indicate that the carrying amounts are expected to be recovered and, therefore, no impairment is indicated as of September 30, 2014. However, it is reasonably possible that the estimate of the fair value of either or both of the Mobile Entertainment and RealPlayer groups may change in the near term should we experience adverse changes in our estimates and assumptions, which could result in impairments of those assets. For further discussion, please see the risk factor entitled, "Any impairment to our goodwill, indefinite-lived intangible assets or definite-lived assets could result in a significant charge to our earnings" under Item 1A Risk Factors.

Valuation of Goodwill and Indefinite-Lived Intangible Assets.� We test goodwill for impairment on an annual basis, in our fourth quarter, or more frequently if circumstances indicate reporting unit carrying values may exceed their fair values. Circumstances that may indicate a reporting unit's carrying value exceeds its fair value include, but are not limited to: poor economic performance relative to historical or projected future operating results; significant negative industry, economic or company specific trends; changes in the manner of our use of the assets or the plans for our business;�and loss of key personnel. Due to the ongoing difficult economic environment and the decline in revenues in our businesses, we continue to monitor whether there could be potential impairment of goodwill.

When evaluating goodwill for impairment, based upon our annual test or due to changes in circumstances described above, we first perform a qualitative assessment to determine if the fair value of a reporting unit is more likely than not less than the reporting unit's carrying amount including goodwill. If this assessment indicates it is more likely than not, we then compare the carrying value of the reporting unit to the estimated fair value of the reporting unit. If the carrying value of the reporting unit exceeds the estimated fair value, we then calculate the implied estimated fair value of goodwill for the reporting unit and compare it to the carrying amount of goodwill for the reporting unit. If the carrying amount of goodwill exceeds the implied estimated fair value, an impairment charge to current operations is recorded to reduce the carrying value to implied estimated value.

Significant judgments and estimates are required in determining the reporting units and assessing the fair value of the reporting units. These estimates and assumptions are complex and subject to a significant degree of judgment with respect to certain factors including, but not limited to, the estimation of the related future revenues, the cash flows of long-term operating plans, valuation multiples, market and interest rate risk, and risk-commensurate discount rates and cost of capital. While we believe our estimates and assumptions are reasonable, due to their complexity and subjectivity, these estimates and assumptions could vary from period to period. Changes in these estimates and assumptions could materially affect the estimated fair market values of the reporting units and result in significant impairments, which could have a material adverse effect on our financial condition or results of operations.

We evaluate indefinite-lived intangible assets (primarily tradenames and trademarks) for impairment on an annual basis, in the fourth quarter, or more frequently if an event occurs or changes in circumstances indicate that impairment may exist. When evaluating indefinite-lived intangible assets for impairment, we may first perform a qualitative assessment to determine if the fair value of the intangible assets is more likely than not greater than its carrying amount. If we do not perform a qualitative assessment or if the fair value of the intangible assets is not more likely than not greater than its carrying amount, we calculate the estimated fair value of the intangible assets. If the carrying amount of the intangible assets exceeds the estimated fair value, an impairment charge is recorded to reduce the carrying value to the implied estimated fair value.

Significant judgments and estimates are required in assessing the fair value of the indefinite-lived intangible assets. These estimates and assumptions are complex and subject to a significant degree of judgment with respect to certain factors including, but not limited to, the estimation of the related future revenues, the cash flows of long-term operating plans, valuation multiples, market and interest rate risk, and risk-commensurate discount rates and cost of capital. While we believe our estimates and assumptions are reasonable, due to their complexity and subjectivity, these estimates and assumptions could vary from period to period. Changes in these estimates and assumptions could materially affect the estimated fair market values of these assets and result in significant impairments, which could have a material adverse effect on our financial condition or results of operations.

Stock-Based Compensation.�Stock-based compensation cost is estimated at the grant date based on the awards fair value and is recognized as expense over the requisite service period, which is the vesting period. For stock options, the fair value is calculated by the Black-Scholes option-pricing model or other appropriate valuation models. The valuation models require various highly judgmental assumptions including volatility in our common stock price and expected option life. If any of the assumptions used in the valuation models change significantly, stock-based compensation expense may differ materially in the future from the amounts recorded in our consolidated statement of operations. For all awards, we are required to estimate forfeitures at the time of grant and revise those estimates in subsequent periods if actual forfeitures differ from those estimates. We use historical data to estimate pre-vesting forfeitures and record stock-based compensation expense only for those awards that are expected to vest.

Accounting for Income Taxes.�We use the asset and liability method of accounting for income taxes. Under this method, income tax expense is recognized for the amount of taxes payable or refundable for the current year. In addition, deferred tax assets and liabilities are recognized for the expected future tax consequences of temporary differences between the financial reporting and tax basis of assets and liabilities and for operating losses and tax credit carryforwards. Deferred tax assets and liabilities and operating loss and tax credit carryforwards are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences and operating loss and tax credit carryforwards are expected to be recovered or settled. We must make assumptions, judgments and estimates to determine current provision for income taxes, deferred tax assets and liabilities and any valuation allowance to be recorded against deferred tax assets. Our judgments, assumptions, and estimates relative to the current provision for income tax take into account current tax laws, our interpretation of current tax laws and possible outcomes of future audits conducted by foreign and domestic tax authorities. Changes in tax law or our interpretation of tax laws and future tax audits could significantly impact the amounts provided for income taxes in our consolidated financial statements.

Each reporting period we must periodically assess the likelihood that our deferred tax assets will be recovered from future sources of taxable income, and to the extent that recovery is not more likely than not, a valuation allowance must be established. The establishment of a valuation allowance and increases to such an allowance result in either increases to income tax expense or reduction of income tax benefit in the statement of operations and comprehensive income. In certain instances, changes in the valuation allowance may be allocated directly to the related components of shareholders' equity on the consolidated balance sheet. Factors we consider in making such an assessment include, but are not limited to, past performance and our expectation of future taxable income, macroeconomic conditions and issues facing our industry, existing contracts, our ability to project future results and any appreciation of our investments and other assets.

As of September�30, 2014, $24.1 million of the $178.0 million of cash, cash equivalents, and short-term investments was held by our foreign subsidiaries.

As of September�30, 2014, we have not provided for U.S. federal and state income taxes on certain undistributed earnings of our foreign subsidiaries, since such earnings are considered indefinitely reinvested outside the U.S. or may be remitted tax-free to the U.S. If these amounts were distributed to the U.S., in the form of dividends or otherwise, RealNetworks could be subject to additional U.S. income and foreign withholding taxes. It is not practicable to determine the foreign withholding and U.S. income tax liability or benefit on such earnings due to the timing of such future distributions, the availability of foreign tax credits, and the complexity of the computation if such earnings were not deemed to be permanently reinvested. If future events, including material changes in estimates of cash, working capital, and long-term investment requirements necessitate that these earnings be distributed, an additional provision for U.S. income and foreign withholding taxes, net of foreign tax credits, may be necessary.


Item 3.	Quantitative and Qualitative Disclosures About Market Risk

The following discussion about our market risk involves forward-looking statements. All statements that do not relate to matters of historical fact should be considered forward-looking statements. Actual results could differ materially from those projected in any forward-looking statements.

Interest Rate Risk.�Our exposure to interest rate risk from changes in market interest rates relates primarily to our short-term investment portfolio. Our short-term investments consist of investment grade debt securities as specified in our investment policy. Investments in both fixed and floating rate instruments carry a degree of interest rate risk. The fair value of fixed rate securities may be adversely impacted due to a rise in interest rates, while floating rate securities may produce less income than expected if interest rates fall. Additionally, a declining rate environment creates reinvestment risk because as securities mature the proceeds are reinvested at a lower rate, generating less interest income. See Note 6, Fair Value Measurements for additional information. Due in part to these factors, our future interest income may be adversely impacted due to changes in interest rates. In addition, we may incur losses in principal if we are forced to sell securities that have declined in market value due to changes in interest rates. Because we have historically had the ability to hold our short-term investments until maturity, we would not expect our operating results or cash flows to be significantly impacted by a sudden

change in market interest rates. There have been no material changes in our investment methodology regarding our cash equivalents and short-term investments during the quarter ended September�30, 2014. Based on our cash, cash equivalents, short-term investments, and restricted cash equivalents as of September�30, 2014, a hypothetical 10% increase/decrease in interest rates would not increase/decrease our annual interest income or cash flows by more than a nominal amount.

Investment Risk.�As of September�30, 2014, we had investments in voting capital stock of both publicly traded and privately held technology companies for business and strategic purposes. See Note 1, Description of Business and Summary of Significant Accounting Policies - Valuation of Equity Method Investments, and Management's Discussion and Analysis of Financial Condition and Results of Operations - Critical Accounting Policies and Estimates (Valuation of equity method investments) in the 10-K for details on our accounting treatment for these investments, including the analysis of other-than-temporary impairments.

Foreign Currency Risk.�We conduct business internationally in several currencies and thus are exposed to adverse movements in foreign currency exchange rates.

Our exposure to foreign exchange rate fluctuations arise in part from: (1)�translation of the financial results of foreign subsidiaries into U.S. dollars in consolidation; (2)�the remeasurement of non-functional currency assets, liabilities and intercompany balances into U.S. dollars for financial reporting purposes; and (3)�non-U.S. dollar denominated sales to foreign customers. We manage a portion of these risks through the use of financial derivatives, but fluctuations could impact our results of operations and financial position.

Generally, our practice is to manage foreign currency risk for the majority of material short-term intercompany balances through the use of foreign currency forward contracts. These contracts require us to exchange currencies at rates agreed upon at the contracts inception. Because the impact of movements in currency exchange rates on forward contracts offsets the related impact on the short-term intercompany balances, these financial instruments help alleviate the risk that might otherwise result from certain changes in currency exchange rates. We do not designate our foreign exchange forward contracts related to short-term intercompany accounts as hedges and, accordingly, we adjust these instruments to fair value through results of operations. However, we may periodically hedge a portion of our foreign exchange exposures associated with material firmly committed transactions, long-term investments, highly predictable anticipated exposures and net investments in foreign subsidiaries. Some of our unhedged exposures are recorded in our statement of operations on a mark-to-market basis each quarter, so to the extent we continue to experience adverse economic conditions, we may record losses related to such unhedged exposures in future periods that may have a material adverse effect on our financial condition and results of operations.

Our foreign currency risk management program reduces, but does not entirely eliminate, the impact of currency exchange rate movements.

We have cash balances denominated in foreign currencies which are subject to foreign currency fluctuation risk. The majority of our foreign currency denominated cash is held in Korean won and euros. A hypothetical 10% increase or decrease in the Korean won and euro relative to the U.S. dollar as of September�30, 2014 would not result in a material impact on our financial position, results of operations or cash flows.


Item 4.	Controls and Procedures

(a) Evaluation of Disclosure Controls and Procedures

Our management, with the participation of our chief executive officer and chief financial officer, evaluated the effectiveness of our disclosure controls and procedures as of September�30, 2014. The term disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended, means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC's rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company's management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives, and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

Based upon that evaluation, our chief executive officer and chief financial officer concluded that, as of September�30, 2014, our disclosure controls and procedures were effective.

(b) Changes in Internal Control over Financial Reporting

There have been no changes in our internal control over financial reporting (as such term is defined in Rule 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during the third quarter of 2014 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II. OTHER INFORMATION

�


Item 1.	Legal Proceedings

We have in the past and could in the future become subject to legal proceedings, governmental investigations and claims in the ordinary course of business, including employment claims, contract-related claims, and claims of alleged infringement of third-party patents, trademarks and other intellectual property rights. Such claims, even if not meritorious, could force us to expend significant financial and managerial resources. In addition, given the broad distribution of some of our consumer products, any individual claim related to those products could give rise to liabilities that may be material to us. In the event of a determination adverse to us, we may incur substantial monetary liability, and/or be required to change our business practices. Either of these could have a material adverse effect on our consolidated financial statements.


Item 1A.	Risk Factors

You should carefully consider the risks described below together with all of the other information included in this Form�10-Q. The risks and uncertainties described below are not the only ones facing our company. Additional risks and uncertainties not presently known to us or that we presently deem less significant may also impair our business operations. If any of the following risks actually occurs, our business, financial condition or operating results, and the trading price of our common stock, could be materially harmed.

Our business and financial results will be materially adversely impacted if we are unable to successfully implement our growth plan, strategic initiatives, and restructuring efforts.

Beginning in mid-2012, we have developed a growth plan that involves the launch of at least one major new product in each of our three business units. In tandem with our growth plan, we have embarked upon strategic initiatives intended to simplify and accelerate our operations, and restructuring efforts intended to streamline costs and bring more focus to our businesses. The simultaneous execution of all of these measures is ambitious and we have not attempted to pursue this level of transition in our history. We can provide no assurance that we will be successful in implementing our growth plan, strategic initiatives, and restructuring efforts, and our failure to do so would have a material adverse impact on our business and financial results.

We need to successfully introduce and monetize new products and services to sustain and grow our businesses.

In order to sustain our current business and to implement our growth plan, we must successfully introduce and monetize new products and services. The process of developing new, and enhancing existing, products and services is complex, costly and uncertain, and is subject to a number of risks. Providing products and services that are attractive and useful to subscribers and consumers is in part subject to unpredictable and volatile factors beyond our control, including end-user preferences and competing products and services. Any failure by us to timely respond to or accurately anticipate consumers changing needs, emerging technological trends or important changes in the market or competition for products and services that we introduce, or that we plan to introduce, could significantly harm our current market share or result in the loss of market opportunities. In addition, we must make long-term investments, develop or obtain appropriate intellectual property and commit significant resources before knowing whether the products and services that we are developing will meet the needs of a large enough group of consumers, which may result in no return or a loss on our investments.

During 2013, each of our businesses introduced at least one new product or service. In November 2013, our Mobile Entertainment business completed its European launch of LISTEN, an application and service for smartphone users featuring ringback tones and other services. LISTEN was launched with T-Mobile in the U.S. in April 2014. In September 2013, our RealPlayer business completed the U.S. launch of RealPlayer Cloud, an integrated video player and cloud service. RealPlayer Cloud was launched globally in February 2014. In August 2013, our Games business launched GameHouse Casino Plus with the Golden Dreams Sweepstakes feature and, in September 2014, our Games business launched its newest game, Slingo Adventure. To date, we have not generated significant revenue from these recently launched products and services. Over the past several quarters, we have invested heavily in the development of these and other new products and enhanced features for such products, and we expect to continue to invest heavily both in further development and in sales and marketing efforts aimed at monetizing these products and related services. There can be no assurance, however, that such efforts will generate significant revenue. If we are unable to generate sustained interest in these products and services, and therefore drive revenue growth, our financial results will be materially negatively impacted.

Furthermore, new products and services may be subject to legal challenge. Responding to these potential claims may require us to enter into royalty and licensing agreements on unfavorable terms, require us to stop distributing or selling, or to redesign our products or services, or to pay damages, any of which could materially harm our operating results.

Our legacy products and services face new and continuing challenges, causing our revenues to suffer.

Our legacy products and services have historically been provided through desktop computers and feature phones, but the number of people who access similar products and services through smartphones and tablets has increased dramatically in the past few years. There are many challenges involved in developing and marketing products and services for users of smartphones and tablets, and there is no guarantee that we will be able to transition our legacy products and services to these devices or to effectively monetize popular and successful versions of these products and services for smartphones and tablets.

In addition, our consumer-based products and services have historically been distributed through desktop operating platforms. As new operating systems are introduced or updated for these platforms, we have faced, and could continue to face, difficulties reaching our traditional customer base and other unknown distribution challenges. If we have difficulty transitioning product and version releases that can easily be distributed through these new or updated operating systems and devices, then our business could be significantly harmed.

As we increasingly focus our development and sales and marketing efforts on our newly launched products and services, sales of our legacy products and services have suffered and will continue to suffer. For instance, while the efforts of our RealPlayer team are targeted more exclusively towards enhanced development and monetization of our new RealPlayer Cloud product, we have significantly reduced our marketing of SuperPass and have redirected our development resources away from RealPlayer Plus, both of which have resulted in declines in the number of subscribers of those legacy products.

Our restructuring efforts may not yield the anticipated benefits to our shareholders.

During 2012, we took steps to restructure and simplify our business and operations. In September 2012, we announced plans to divisionalize our business, which we implemented during the first quarter of 2013, and to significantly reduce operating expenses, in part through a reduction in our workforce that was substantially concluded by the end of the second quarter of 2013. In August 2014, we announced a further reduction in our workforce and related cost reductions. We continue to assess opportunities to further streamline our operations and make our businesses more efficient. There can be no assurance, however, that our past or future restructuring efforts will be successful. Our business and operations may be harmed to the extent there is customer or employee uncertainty surrounding the future direction of our product and service offerings and strategy for our businesses. Our restructuring activities have included implementing cost-cutting initiatives, which may not lead to future profitability and which could materially impact our ability to compete in future periods. If we are unable to effectively re-align the cost structure of our businesses or streamline and simplify our operations, our stock price may be adversely affected, and we and our shareholders will not realize the anticipated financial, operational and other benefits from such initiatives.

Our businesses face substantial competitive challenges that may prevent us from being successful in those businesses, and may negatively impact future growth in those businesses.

Many of our current and potential competitors in our businesses have longer operating histories, greater name recognition, more employees and significantly greater resources than we do. To effectively compete in the markets for our products and services, we may experience the following consequences, any of which would adversely affect our operating results and the trading price of our stock:


"	reduced prices or margins,


"	loss of current and potential customers, or partners and potential partners who provide content we distribute to our customers,


"	changes to our products, services, technologies, licenses or business practices or strategies,


"	lengthened sales cycles,


"	industry-wide changes in content distribution to customers or in trends in consumer consumption of digital media products and services,


"	pressure to prematurely release products or product enhancements, or


"	degradation in our stature or reputation in the market.

The market for mobile entertainment services, including our ringback tones and music on demand solutions, is highly competitive and evolving rapidly, particularly with the growth in the use of smartphones. Increased use of smartphones has resulted in a proliferation of applications and services that compete with our SaaS services and, in many cases, are not dependent upon our carrier customers to make them available to subscribers. To maintain or enhance our competitive position, we need to develop new SaaS services that enable our carrier customers to compete with the broad range of applications and

other services available in the market. We face competition, and may face future competition, from major media companies, Internet portal companies, content aggregators, wireless software providers and other pure-play wireless entertainment publishers, some of which have greater financial resources than we do. Furthermore, while most of our carrier customers do not offer internally developed services that compete with ours, if our carrier customers begin developing these services internally, we could be forced to lower our prices or increase the amount of service we provide in order to maintain our business with those carrier customers. Increased competition has in the past resulted in pricing pressure, forcing us to lower the selling price of our services. If we are unable to develop or provide services that compete effectively in the mobile entertainment market, our operating results and financial condition may be materially harmed.

Our legacy RealPlayer software services compete with alternative streaming media playback technologies and audio and video formats including Microsoft Windows Media Player and Adobe Flash and their related file formats, each of which has obtained very broad market penetration. In addition, our overall ability to sell subscription services depends in part on the use of our formats on the Internet, and declines in the use of our formats have negatively affected, and are expected to continue to negatively affect, our subscription revenue and increase costs of obtaining new subscribers. Our SuperPass subscription service, within our RealPlayer business unit, continues to face increasingly intense competition from a broad variety of entertainment sources, including traditional media outlets and Internet media sources. We expect that our recently launched RealPlayer Cloud product will face competition from other cloud service providers, including some that are firmly established in the marketplace and have access to extensive resources. If we are unable to compete successfully, including through the development, marketing and monetization of new or recently launched products and services, our RealPlayer business could continue to decline.

The branded services in our Games business compete with other online aggregators and distributors of online, downloadable and social casual PC games. Some of these competitors have high volume distribution channels and greater financial resources than we do. Our Games business also competes with many other smaller companies that may be able to adjust to market conditions, including responding effectively to the growing popularity of casual games on social networks, faster than us. We also face significant price competition in the casual games market, and some of our competitors may be able to lower prices more aggressively than us. We expect competition to continue to intensify in this market from these and other competitors. We cannot provide assurance that we will be able to slow recent revenue declines or achieve future growth in our revenue, particularly as we continue to invest in social and mobile games as the market for these games continues to rapidly evolve. Our games development studios compete primarily with other developers of online, downloadable, mobile and social casual PC games and must continue to develop popular and high-quality game titles. Our Games business must also continue to execute on opportunities to expand the play of our games on a variety of non-PC platforms, including social networks, in order to maintain our competitive position and to grow the business.

Contracts with our carrier customers subject us to significant risks that could negatively impact our revenue or otherwise harm our operating results.

We derive a material portion of our revenue from the SaaS offerings we provide to carriers. Many of our SaaS contracts with carriers provide for revenue sharing arrangements, but we have little control over the pricing decisions of our carrier customers. Furthermore, most of these contracts do not provide for guaranteed minimum payments or usage levels. Because most of our carrier customer contracts are nonexclusive, it is possible that our mobile carrier customers could purchase similar services from third parties and cease to use our services in the future. As a result, our revenue derived under these agreements could be substantially reduced depending on the pricing and usage decisions of our carrier customers. In addition, some of our SaaS contracts require us to incur significant set-up costs prior to the launch of services with a carrier customer. For example, in the fourth quarter of 2011, we reduced our forecast for profitability associated with certain carrier customer contracts for which the total costs exceeded the total revenue we expect to recognize from these contracts, and as a result, we recorded impairment of deferred costs totaling $20.0 million. There can be no assurance that we will not record additional impairments or other charges in future periods related to our carrier customer contracts, which would negatively impact our results of operations.

In addition, none of our SaaS contracts with carriers obligates our carrier customers to market or distribute any of our SaaS offerings. Despite the lack of marketing commitments, revenue related to our SaaS offerings is, to a large extent, dependent upon the marketing and promotion activities of our carrier customers. In addition, many of our carrier contracts are short term and allow for early termination by the carrier with or without cause. These contracts are therefore subject to renegotiation of pricing or other key terms that could be adverse to our interests and leave us vulnerable to non-renewal by the carriers. The loss of carrier customers, a reduction in marketing or promotion of our SaaS offerings, or the termination, non-renewal or renegotiation of contract terms that are less favorable to us would likely result in the loss of future revenues from our SaaS offerings.

Finally, nearly all of our carrier contracts obligate us to indemnify the carrier customer for certain liabilities and losses incurred by them, including liabilities resulting from third party claims for damages that arise out of the use of our technology. These indemnification terms provide us with certain procedural safeguards, including the right to control the defense of the indemnified party. Pursuant to these indemnifications obligations, we have in the past agreed to control the defense on behalf of certain of our carrier customers related to patent infringement proceedings. We have recently settled two such litigation matters. Future claims against which we may be obligated to defend our carrier customers could result in payments that could materially harm our business or our consolidated financial statements.

A majority of the revenue that we generate in our Mobile Entertainment business segment is dependent upon our relationships with a few customers, and any deterioration of these relationships could materially harm our revenue.

We generate a significant portion of our revenue from sales of our mobile entertainment services to a few of our mobile carrier customers, including SK Telecom, a leading wireless carrier in South Korea, and its affiliates. In the near term, we expect that we will continue to generate a significant portion of our total revenue from these customers. If these customers fail to market or distribute our services or terminate or fail to renew their business contracts with us, or if our relationships with these customers deteriorate in any significant way, we may be unable to replace the affected business arrangements with acceptable alternatives. Failure to maintain our relationships with these customers could have a material negative impact on our revenue.

We may not be successful in maintaining and growing our distribution of digital media products.

Maintaining and growing the distribution of digital media products through our websites and our other distribution channels has historically been important to our business, including growth through the introduction of new products and services distributed through these channels. We cannot predict whether consumers will continue to download and use our digital media products consistent with past usage, which may reduce our ability to generate revenue from those products as well as result in lower than expected adoption of newly introduced products and services. Our inability to maintain continued high volume distribution of our digital media products could also hold back the growth and development of related revenue streams from these market segments, including the distribution of third-party products and sales of our subscription services, and therefore could harm our business and our prospects. Our revenue from the distribution of third-party products will also be negatively impacted if those products are not widely downloaded by consumers, including due to the relative market saturation of such products. Most of our revenue from the distribution of third-party products was historically derived from a single customer, however that relationship ended during the third quarter of 2014, and we entered into an agreement with a new distribution partner. We anticipate that our distribution revenue will be materially negatively impacted by this change.

Our operating results are difficult to predict and may fluctuate, which may contribute to continued weakness in our stock price.

The trading price for our common stock has a history of volatility. Although our recent stock price history shows more stability, with a range from $6.94 to $8.85 per share during the 52-week period ended September�30, 2014, it also shows continued weakness. As a result of the rapidly changing markets in which we compete, our operating results may fluctuate from period to period, which may contribute to volatility of our stock price.

In past periods, our operating results have been affected by personnel reductions and related restructuring charges, lease exit and related charges, and impairment charges for certain of our equity investments, goodwill and other long-lived assets. In addition to these factors, the general difficulty in forecasting our operating results and metrics could result in actual results that differ significantly from expected results, causing volatility and continued weakness in our stock price.

Certain of our product and service investment decisions (for example, research and development and sales and marketing efforts) are based on predictions regarding business and the markets in which we compete. Fluctuations in our operating results, particularly when experienced beyond what we expected, could cause the trading price of our stock to fluctuate. Weakness in our operating performance, is likely to cause continued weakness in our stock price.

Any impairment to our goodwill, indefinite-lived intangible assets and definite-lived assets could result in a significant charge to our earnings.

In accordance with accounting principles generally accepted in the United States, we are required to test goodwill and indefinite-lived intangible assets for possible impairment on an annual basis based upon a fair value approach, or more frequently in the event of certain indications of possible impairment. We review definite-lived assets for impairment whenever events or changes in circumstances indicate the carrying amount of such assets may not be recoverable. These events or circumstances could include a significant change in the business climate, including a significant sustained decline in a reporting units market value, legal factors, operating performance indicators, competition, sale or disposition of a significant portion of

our business, a significant sustained decline in our market capitalization and other factors. If we were to determine that an impairment had occurred, we would be required to record an impairment charge, which could have a significant negative, and unpredicted, impact on our financial results. The total carrying value of our goodwill, indefinite-lived intangible assets and definite-lived assets as of September 30, 2014 was $47 million.

Continued loss of revenue from some of our subscription services may continue to harm our operating results.

Our operating results have been and could continue to be adversely impacted by the loss of subscription revenue related to our legacy services and by the failure to generate revenue related to our new services. Subscribers may cancel their subscriptions to our services for many reasons, including a perception that they do not use the services sufficiently or that the service does not provide enough value, a lack of attractive or exclusive content generally or as compared with competitive service offerings, or because customer service issues are not satisfactorily resolved. Revenue from our SuperPass subscription service, for example, has declined in recent periods due in part to our focus on other products and services we offer, and we expect this trend to continue. For the subscription services we offer, we must continue to obtain compelling digital media content for our video and games services in order to maintain and increase usage and overall customer satisfaction for these products. Our operating results may be negatively impacted if we cannot obtain content for our subscription services on commercially reasonable terms.

Government regulation of the Internet is evolving, and unfavorable developments could have an adverse affect on our operating results.

We are subject to regulations and laws specific to the marketing, sale and delivery of goods and services over the Internet. These laws and regulations, which continue to evolve, cover taxation, user privacy, data collection and protection, copyrights, electronic contracts, sales procedures, automatic subscription renewals, credit card processing procedures, consumer protections, digital games distribution, broadband Internet access and content restrictions. We cannot guarantee that we have been or will be fully compliant in every jurisdiction, as it is not entirely clear how existing laws and regulations governing issues such as privacy, taxation and consumer protection apply or will be enforced with respect to the products and services we sell through the Internet. Moreover, as Internet commerce continues to evolve, increasing regulation and/or enforcement efforts by federal, state and foreign agencies and the prospects for private litigation claims related to our data collection, privacy policies or other e-commerce practices become more likely. In addition, the adoption of any laws or regulations or the imposition of other legal requirements that adversely affect our ability to market, sell, and deliver our products and services�could decrease our ability to offer or customer demand for our service offerings, resulting in lower revenue. Future regulations, or changes in laws and regulations or their existing interpretations or applications, could also require us to change our business practices, raise compliance costs or other costs of doing business and result in additional historical or future liabilities for us, resulting in adverse impacts on our business and our operating results.

As a consumer-facing business, we receive complaints from our customers regarding our consumer marketing efforts and our customer service practices. Some of these customers may also complain to government agencies, and from time to time, those agencies have made inquiries to us about these practices. In addition, we may receive complaints or inquiries directly from governmental agencies that have not been prompted by consumers. In May�of 2012, we resolved an investigation and complaint filed against us by the Washington State Office of the Attorney General, or Washington AG, relating to our consumer marketing practices through the entry of a consent decree filed in King County, Washington Superior Court. While we resolved that matter, we cannot provide assurance that the Washington AG or other governmental agencies will not bring future claims regarding our marketing, or consumer services or other practices.

Uncertainty and adverse conditions in the economy could have a material adverse impact on our business, financial condition and results of operations.

The ongoing weakness in the national and global economy has resulted in declines in overall consumer and corporate spending, declines in consumer and corporate access to credit, fluctuations in foreign exchange rates, declines in the value of assets and increased liquidity risks, all of which could materially impact our business, financial condition and results of operations. We provide digital entertainment services to consumers directly and indirectly through our carrier customers. Consumers may consider the purchase of our products and services to be a discretionary expenditure. As a result, consumers considering whether to purchase our products or services may be influenced by macroeconomic factors that affect consumer spending such as unemployment, conditions in the residential real estate and mortgage markets and access to credit when making a determination whether to commence, continue, or stop subscribing to or otherwise purchasing our products and services. In addition, businesses may reduce their advertising spending during adverse macroeconomic conditions, which would negatively impact the revenue we generate through sales of advertising on our websites and other properties. We have recorded material asset impairment charges in recent years due in part to weakness in the global economy, and if the ongoing

significant weakness and uncertainty in the global economy continues, we may need to record additional impairments to our assets in future periods. If any of these risks are realized, we may experience a material adverse impact on our financial condition and results of operations.

Rhapsody could continue to recognize losses, which would negatively impact our results of operations and financial condition.

On March�31, 2010, we completed the restructuring of our digital audio music service joint venture, Rhapsody America LLC. As a result of the restructuring, we no longer have operational control over Rhapsody and Rhapsodys operating performance is no longer consolidated with our consolidated financial statements. Rhapsody has generated accounting losses since its inception and we have recognized losses on our investment in the convertible preferred stock of Rhapsody since the restructuring. If Rhapsody continues to incur losses, or if it otherwise experiences a significant decline in its business, we may incur further losses on our investment, which could have an adverse effect on our financial condition and results of operations. See Note 5, Rhapsody Joint Venture, for details on the liquidation preference on our convertible preferred investment.

Given the current proportion of the outstanding equity of Rhapsody that we hold, we need to receive Rhapsodys unaudited quarterly financial statements and related information in order to timely prepare our quarterly consolidated financial statements and also to report certain of Rhapsodys financial results, as may be required, in our quarterly reports on Form 10-Q. In addition, we may be required to include Rhapsodys annual audited financial statements in our annual report on Form 10-K in future periods. As we no longer exert operational control over Rhapsody, we cannot guarantee that Rhapsody will deliver its financial statements and related information to us in a timely manner, or at all, or that the unaudited financial statement information provided by Rhapsody will not contain inaccuracies that are material to our reported results. Any failure to timely obtain Rhapsodys quarterly financial statements or to include its audited financial statements in our future annual reports on Form 10-K, if required, could cause our reports to be filed in an untimely manner, which would preclude us from utilizing certain registration statements and could negatively impact our stock price.

The loss of key personnel, or difficulty recruiting and retaining them, could significantly harm our business or jeopardize our ability to meet our growth objectives.

Our success depends substantially on the contributions and abilities of certain key executives and employees. We have experienced a significant amount of executive-level turnover in the past several years, which has had and could continue to have a negative impact on our ability to retain key employees. Rob Glaser, our founder, Chairman and initial chief executive officer, resigned as chief executive officer in 2010, was appointed as interim chief executive officer in July 2012, and was named permanent chief executive officer in July 2014. In addition, each member of our executive team is either new to RealNetworks or new to his executive position as of 2012, 2013 or 2014. We cannot provide assurance that we will effectively manage these executive-level transitions, which may impact our ability to retain key executives and employees and which could harm our business and operations to the extent there is customer or employee uncertainty arising from such transitions.

Our success is also substantially dependent upon our ability to identify, attract and retain highly skilled management, technical and sales personnel. Qualified individuals are in high demand and competition for such qualified personnel in our industry, particularly engineering talent, is intense, and we may incur significant costs to attract or retain them. Our ability to attract and retain personnel may also be made more difficult by the uncertainty created by our recent executive-level turnover and by our restructuring efforts, which have involved reductions in our workforce. There can be no assurance that we will be able to attract and retain the key personnel necessary to sustain our business or support future growth.

Acquisitions and divestitures involve costs and risks that could harm our business and impair our ability to realize potential benefits from these transactions.

As part of our business strategy, we have acquired and sold technologies and businesses in the past and expect that we will continue to do so in the future. The failure to adequately manage transaction costs and address the financial, legal and operational risks raised by acquisitions and divestitures of technology and businesses could harm our business and prevent us from realizing the benefits of these transactions. In addition, we may identify and acquire target companies, but those companies may not be complementary to our current operations and may not leverage our existing infrastructure or operational experience, which may increase the risks associated with completing acquisitions.

Transaction-related costs and financial risks related to completed and potential future purchase or sale transactions may harm our financial position, reported operating results, or stock price. Previous acquisitions have resulted in significant expenses, including amortization of purchased technology, amortization of acquired identifiable intangible assets and the incurrence of charges for the impairment of goodwill and other intangible assets, which are reflected in our operating expenses. New acquisitions and any potential additional future impairment of the value of purchased assets, including goodwill, could have a significant negative impact on our future operating results. For example, in 2013 we acquired Slingo, Inc. pursuant to

which we recorded $8.0 million of intangible assets and $9.9 million in goodwill, and Muzicall Limited pursuant to which we recorded $5.4 million of intangible assets and $1.3 million in goodwill. In compliance with accounting principles generally accepted in the United States, we evaluate these assets for impairment at least annually. Factors that may be considered a change in circumstances, indicating that our goodwill, indefinite-lived intangible assets or definite-lived assets may not be recoverable, include reduced future revenue and cash flow estimates due to changes in our forecasts, and unfavorable changes to valuation multiples and discount rates due to changes in the market. If we were to conclude that any of these assets were impaired, we would have to recognize an impairment charge that could significantly impact our financial results.

Purchase and sale transactions also involve operational risks that could harm our existing operations or prevent realization of anticipated benefits from a transaction. These operational risks include:


"	difficulties and expenses in assimilating the operations, products, technology, information systems, and/or personnel of the acquired company;


"	retaining key management or employees of the acquired company;


"	entrance into unfamiliar markets, industry segments, or types of businesses;


"	operating, managing and integrating acquired businesses in remote locations or in countries in which we have little or no prior experience;


"	diversion of management time and other resources from existing operations;


"	impairment of relationships with employees, affiliates, advertisers or content providers of our business or acquired business; and


"	assumption of known and unknown liabilities of the acquired company, including intellectual property claims.

We may be unable to adequately protect our proprietary rights or leverage our technology assets, and may face risks associated with third-party claims relating to intellectual property rights associated with our products and services.

Our ability to compete across our businesses partly depends on the superiority, uniqueness and value of our technology, including both internally developed technology and technology licensed from third parties. To protect our proprietary rights, we rely on a combination of patent, trademark, copyright and trade secret laws, confidentiality agreements with our employees and third parties, and protective contractual provisions. Our efforts to protect our intellectual property rights may not assure our ownership rights in our intellectual property, protect or enhance the competitive position of our products and services or effectively prevent misappropriation of our technology. We also routinely receive challenges to our trademarks and other proprietary intellectual property that we are using in our business activities in China. Disputes regarding the validity and scope of patents or the ownership of technologies and rights associated with streaming media, digital distribution, and online businesses are common and likely to arise in the future. While we sold to Intel Corporation in 2012 most of our patents, including patents that covered streaming media, we agreed to indemnify Intel for certain third-party infringement claims against these patents up to the purchase price we received in the sale. We may also be forced to litigate to enforce or defend our patents and other intellectual property rights or to determine the validity and scope of other parties proprietary rights, enter into royalty or licensing agreements on unfavorable terms or redesign our product features and services. Any such dispute would likely be costly and distract our management, and the outcome of any such dispute could fail to improve our business prospects or otherwise harm our business.

From time to time we receive claims and inquiries from third parties alleging that our technology may infringe the third parties proprietary rights, especially patents. Third parties have also asserted and most likely will continue to assert claims against us alleging contract breaches, infringement of copyrights, trademark rights, trade secret rights or other proprietary rights, or alleging unfair competition or violations of privacy rights. These claims, even if not meritorious, could force us to spend significant financial and managerial resources. Given the broad distribution of some of our consumer products, any individual claim related to those products could give rise to liabilities that may be material to us. For example, in July�2012, VoiceAge Corporation brought a lawsuit against us alleging breach of our obligation to pay them licensing fees under our patent license agreement with VoiceAge and seeking a material amount in damages. While we settled the dispute with VoiceAge in the fourth quarter of 2013, similar future lawsuits could result in significant legal expenses, monetary damages, penalties or injunctive relief against us that could have a material adverse impact on our future consolidated financial statements. In addition, in 2012 we sold substantially all of our patent assets to Intel. We believe that our patent portfolio may have in the past discouraged third parties from bringing infringement or other claims against us relating to the use of our technologies in our business. Accordingly, we cannot predict whether the sale of these patent assets to Intel will result in additional infringement or other claims against us from third parties.

Our business and operating results will suffer if our systems or networks fail, become unavailable, unsecured or perform poorly so that current or potential users do not have adequate access to our products, services and websites.

Our ability to provide our products and services to our customers and operate our business depends on the continued operation and security of our information systems and networks. A significant or repeated reduction in the performance,

reliability, security or availability of our information systems and network infrastructure could harm our ability to conduct our business, and harm our reputation and ability to attract and retain users, customers, advertisers and content providers. We have on occasion experienced system errors and failures that caused interruption in availability of products or content or an increase in response time. Problems with our systems and networks could result from our failure to adequately maintain and enhance these systems and networks, natural disasters and similar events, power failures, HVAC failures, intentional actions to disrupt our systems and networks and many other causes. The vulnerability of a large portion of our computer and communications infrastructure is enhanced because much of it is located at two leased facilities in Seattle, Washington, an area that is at heightened risk of earthquake, flood, and volcanic events. Many of our services do not currently have fully redundant systems or a formal disaster recovery plan, and we may not have adequate business interruption insurance to compensate us for losses that may occur from a system outage.

The growth of our business is dependent in part on successfully managing our international operations.

Our international operations involve risks inherent in doing business globally, including difficulties in managing operations due to distance, language, and cultural differences, local economic conditions, different or conflicting laws and regulations, taxes, and exchange rate fluctuations. The functional currency of our foreign subsidiaries is the local currency of the country in which each subsidiary operates. We translate our subsidiaries revenues into U.S. dollars in our financial statements, and continued volatility in foreign exchange rates, particularly if the U.S. dollar strengthens against the euro or the Korean won, may result in lower reported revenue or net assets in future periods. Our foreign currency exchange risk management program reduces, but does not eliminate, the impact of currency exchange rate movements. If we do not effectively manage any of the risks inherent in running our international businesses, our operating results and financial condition could be harmed.

We may be subject to market risk and legal liability in connection with our data collection and data security capabilities.

Many of our products are interactive Internet applications that by their very nature require communication between a client and server to operate. For example, to provide better consumer experiences and to operate effectively, our products send information, including personally identifiable information, to our servers. In addition, we sell many of our products and services through online sales transactions directly with consumers, through which we collect and store credit card information. In connection with our direct sales to consumers, we may be the victim of fraudulent transactions, including credit card fraud, which presents a risk to our revenue and potentially disrupts service to our consumers. While we take measures to protect our consumer data, we have experienced unauthorized access to our consumer data in the past, and it is possible that our security controls over consumer data may not prevent future improper access or disclosure of credit card information or personally identifiable information. We have an extensive privacy policy concerning the collection, use and disclosure of user data involved in interactions between our client and server products. A security breach that leads to disclosure of consumer account information (including personally identifiable information) or any failure by us to comply with our posted privacy policy or existing or new legislation regarding privacy issues could harm our reputation, impact the market for our products and services, subject us to litigation, and require us to expend significant resources to mitigate the breach of security, comply with breach notification laws or address related matters. In addition, we will also need to maintain compliance with the Payment Card Industry, or PCI, compliance standard for data security, which we recently achieved, in connection with our use of credit card services for payment. If we fail to maintain the PCI compliance standards we may be subject to substantial monetary penalties and we could lose the ability to accept credit card payments for transactions with our customers. Any of these consequences could materially harm our business or our consolidated financial statements.

Changes in regulations applicable to the Internet and e-commerce that increase the taxes on the services we provide could materially harm our business and operating results.

As Internet commerce continues to evolve, increasing taxation by state, local or foreign tax authorities becomes more likely. For example, taxation of electronically delivered products and services or other charges imposed by government agencies may also be imposed.�We believe we collect transactional taxes and are compliant and current in all jurisdictions where we believe we have a collection obligation for transaction taxes. Any regulation imposing greater taxes or other fees for products and services could result in a decline in the sale of products and services and the viability of those products and services, harming our business and operating results. A successful assertion by one or more states or foreign tax authorities that we should collect and remit sales or other taxes on the sale of our products or services could result in substantial liability for past sales.

In those countries where we have taxable presence, we collect value added tax, or VAT, on sales of electronically supplied services provided to European Union residents. The collection and remittance of VAT subjects us to additional currency fluctuation risks.

We may be subject to additional income tax assessments.

We are subject to income taxes in the U.S. and numerous foreign jurisdictions. Significant judgment is required in determining our worldwide provision for income taxes, income taxes payable, and net deferred tax assets. In the ordinary course of business, there are many transactions and calculations where the ultimate tax determination is uncertain. Although we believe our tax estimates are reasonable, the final determination of tax audits and any related litigation could be materially different than that which is reflected in our historical financial statements. An audit or litigation can result in significant additional income taxes payable in the U.S. or foreign jurisdictions which could have a material adverse effect on our financial condition and results of operations.

Our Chairman of the Board and Chief Executive Officer beneficially owns approximately 36% of our stock, which gives him significant control over certain major decisions on which our shareholders may vote or may discourage an acquisition of us.

Robert Glaser, our Chairman of the Board and Chief Executive Officer, beneficially owns approximately 36% of our common stock. As a result, Mr.�Glaser and his affiliates will have significant influence to:


"	elect or defeat the election of our directors;


"	amend or prevent amendment of our articles of incorporation or bylaws;


"	effect or prevent a merger, sale of assets or other corporate transaction; and


"	control the outcome of any other matter submitted to the shareholders for vote.

The stock ownership of Mr.�Glaser and his affiliates may discourage a potential acquirer from making a tender offer or otherwise attempting to obtain control of RealNetworks, which in turn could reduce our stock price or prevent our shareholders from realizing a premium over our stock price.

Provisions of our charter documents, shareholder rights plan, and Washington law could discourage our acquisition by a third party.

Our articles of incorporation provide for a strategic transactions committee of the board of directors. Without the prior approval of this committee, and subject to certain limited exceptions, the board of directors does not have the authority to:


"	adopt a plan of merger;


"	authorize the sale, lease, exchange or mortgage of assets representing more than 50% of the book value of our assets prior to the transaction or on which our long-term business strategy is substantially dependent;


"	authorize our voluntary dissolution; or


"	take any action that has the effect of any of the above.

Mr.�Glaser has special rights under our articles of incorporation to appoint or remove members of the strategic transactions committee at his discretion that could make it more difficult for RealNetworks to be sold or to complete another change of control transaction without Mr.�Glasers consent. RealNetworks has also entered into an agreement providing Mr.�Glaser with certain contractual rights relating to the enforcement of our charter documents and Mr.�Glasers roles and authority within RealNetworks. These rights and his role as Chairman of the Board of Directors, together with Mr.�Glasers significant beneficial ownership, create unique potential for concentrated influence of Mr.�Glaser over potentially material transactions involving RealNetworks and decisions regarding the future strategy and leadership of RealNetworks.

We have adopted a shareholder rights plan, which was amended and restated in December 2008, which provides that shares of our common stock have associated preferred stock purchase rights. The exercise of these rights would make the acquisition of RealNetworks by a third party more expensive to that party and has the effect of discouraging third parties from acquiring RealNetworks without the approval of our board of directors, which has the power to redeem these rights and prevent their exercise.

Washington law imposes restrictions on some transactions between a corporation and certain significant shareholders. The foregoing provisions of our charter documents, shareholder rights plan, our agreement with Mr.�Glaser, and Washington law, as well as our charter provisions that provide for a classified board of directors and the availability of blank check preferred stock, could have the effect of making it more difficult or more expensive for a third party to acquire, or of discouraging a third party from attempting to acquire, control of us. These provisions may therefore have the effect of limiting the price that investors might be willing to pay in the future for our common stock.


Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds

(a) Not applicable

(b) Not applicable


Item 3.	Default Upon Senior Securities

None�


Item 4.	Mine Safety Disclosures

Not applicable


Item 5.	Other Information

None


Item 6.	Exhibits

See Index to Exhibits below.

�

SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized, on November�5, 2014.

�



�	REALNETWORKS, INC.
�	�	�
�	By:	�	/s/��Tim M. Wan��
�	�	�	Tim M. Wan
�	Title:	�	Chief�Financial�Officer�and�Treasurer (Principal Financial and Accounting Officer)

INDEX TO EXHIBITS

�



Exhibit Number	Description
�	�
10.1	RealNetworks, Inc. 2005 Stock Incentive Plan, as amended and restated effective July 24, 2014
�	�
10.2	Offer Letter dated July 24, 2014 between RealNetworks, Inc. and Robert Glaser
�	�
31.1	Certification of Robert Glaser, Chairman and Chief Executive Officer of RealNetworks, Inc., pursuant to Exchange Act Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
�	�
31.2	Certification of Tim M. Wan, Chief Financial Officer and Treasurer of RealNetworks, Inc., pursuant to Exchange Act Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
�	�
32.1	Certification of Robert Glaser, Chairman and Chief Executive Officer of RealNetworks, Inc., pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
�	�
32.2	Certification of Tim M. Wan, Chief Financial Officer and Treasurer of RealNetworks, Inc., pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
�	�
101.INS	XBRL Instance Document
�	�
101.SCH	XBRL Taxonomy Extension Schema Document
�	�
101.CAL	XBRL Taxonomy Extension Calculation Linkbase Document
�	�
101.LAB	XBRL Taxonomy Extension Label Linkbase Document
�	�
101.PRE	XBRL Taxonomy Extension Presentation Linkbase Document
�	�
101.DEF	XBRL Taxonomy Extension Definition Linkbase Document

�

Exhibit 10.1

REALNETWORKS, INC.
2005 Stock Incentive Plan,
as amended and restated effective July 24, 2014

1.PURPOSE OF THE PLAN

1.1��Purpose. The purpose of the RealNetworks, Inc. 2005�Stock Incentive Plan (the Plan), as amended and restated effective as of July 24,�2014 (the Restatement Date), is to assist RealNetworks, Inc., a Washington corporation (the Company), and its subsidiaries in attracting and retaining selected individuals to serve as employees, directors, consultants and/or advisors of the Company who are expected to contribute to the Companys success and to achieve long-term objectives which will inure to the benefit of all shareholders of the Company through the additional incentives inherent in the Awards hereunder.

2.��DEFINITIONS

2.1��Award shall mean any Option, Stock Appreciation Right, Restricted Stock Award, Restricted Stock Unit Award, Performance Award, Other Share-Based Award or any other right, interest or option relating to Shares or other property (including cash) granted pursuant to the provisions of the Plan.

2.2��Award Agreement shall mean any agreement, contract or other instrument or document, including through an electronic medium, evidencing any Award granted by the Committee hereunder.

2.3��Board shall mean the board of directors of the Company.

2.4��Code shall mean the Internal Revenue Code of 1986, as amended from time to time.

2.5��Committee shall mean the Compensation Committee of the Board or a subcommittee thereof formed by the Compensation Committee to act as the Committee hereunder. The Committee shall consist of no fewer than two Directors, each of whom is (a)�a Non-Employee Director within the meaning of Rule 16b-3 of the Exchange Act, (b)�an outside director within the meaning of Section�162(m) of the Code, and (c)�an independent director for purpose of the rules and regulations of the NASDAQ Stock Market.

2.6��Covered Employee shall mean a covered employee within the meaning of Section�162(m) of the Code.

2.7��Director shall mean a non-employee member of the Board.

2.8��Determination Date shall mean the latest possible date that will not jeopardize the qualification of an Award granted under the Plan as performance-based compensation under Section�162(m) of the Code.

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2.9��Employee shall mean any employee of the Company or any Subsidiary and any prospective employee conditioned upon, and effective not earlier than, such persons becoming an employee of the Company or any Subsidiary. Solely for purposes of the Plan, an Employee shall also mean any consultant or advisor who provides services to the Company or any Subsidiary, so long as such person (a)�renders bona fide services that are not in connection with the offer and sale of the Companys securities in a capital-raising transaction and (b)�does not directly or indirectly promote or maintain a market for the Companys securities.

2.10��Exchange Act shall mean the Securities Exchange Act of 1934, as amended.

2.11��Fair Market Value shall mean, with respect to any property other than Shares, the market value of such property determined by such methods or procedures as shall be established from time to time by the Committee. The Fair Market Value of Shares as of any date shall be the per Share closing price of the Shares as reported on the NASDAQ Stock Market on that date (or if there was no reported price on such date, on the next date on which the price was reported); if the Company is not then listed on the NASDAQ Stock Market but is listed on the New York Stock Exchange, the Fair Market Value of the Shares shall be the per Share closing price of the Shares as reported on the New York Stock Exchange on that date (or if there was no reported price on such date, on the last preceding date on which the price was reported); or, if the Company is not then listed on the NASDAQ Stock Market or the New York Stock Exchange, the Fair Market Value of Shares shall be determined by the Committee in its sole discretion using appropriate criteria.

2.12��Freestanding Stock Appreciation Right shall have the meaning set forth in Section�6.1.

2.13��Incentive Stock Option shall mean an Option that by its terms qualifies and is intended to qualify as an incentive stock option within the meaning of Section�422 of the Code and the regulations promulgated thereunder.

2.14��Limitations shall have the meaning set forth in Section�11.6.

2.15��Nonstatutory Stock Option shall mean an Option that by its terms does not qualify or is not intended to qualify as an Incentive Stock Option.

2.16��Option shall mean any right granted to a Participant under the Plan allowing such Participant to purchase Shares at such price or prices and during such period or periods as the Committee shall determine.

2.17��Other Share-Based Award shall have the meaning set forth in Section�9.1.

2.18��Participant shall mean an Employee or Director who is selected by the Committee to receive an Award under the Plan.

2.19��Payee shall have the meaning set forth in Section�14.2.

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2.20��Performance-Based Award shall mean an Award that is subject to the terms and conditions set forth in Section�11. All PerformanceBased Awards are intended to constitute qualified performancebased compensation under Section�162(m) of the Code.

2.21��Performance Award shall mean any Award of Performance Shares or Performance Units granted pursuant to Section�10.

2.22��Performance Goals shall mean the goal or goals (or combined goals) determined by the Committee (in its discretion) to be applicable to a Participant with respect to an Award. As determined by the Committee, the Performance Goals applicable to an Award may provide for a targeted level or levels of achievement using one or more of the following measures: net revenue; revenue growth; earnings per share; net income; division, group or corporate financial goals; total shareholder return; attainment of strategic and operational initiatives; appreciation in and/or maintenance of the price of the Shares or any other publicly-traded securities of the Company; market share; gross profits; earnings before taxes, earnings before interest and taxes; earnings before interest, taxes, depreciation and amortization; comparisons with various stock market indices; reductions in costs; cash flow, cash flow per share; return on invested capital; cash flow return on investment; and improvement in or attainment of expense levels on working capital levels of the Company or any Subsidiary, division, business segment or business unit of the Company for or within which the Participant is primarily employed. Prior to the Determination Date, the Committee shall determine whether any element(s) or item(s) shall be included in or excluded from the calculation of any Performance Goal with respect to any Participants and whether a Performance Goal shall be measured in accordance with generally accepted accounting principles (GAAP) or a basis other than GAAP.

2.23��Performance Period shall mean that period established by the Committee at the time any Performance Award or other performance-based Award is granted or at any time thereafter during which any performance goals specified by the Committee with respect to such Award are to be measured.

2.24��Performance Share shall mean any grant pursuant to Section�10 of a unit valued by reference to a designated number of Shares, which value may be paid to the Participant by delivery of such property as the Committee shall determine, including cash, Shares, other property, or any combination thereof, upon achievement of such performance goals during the Performance Period as the Committee shall establish at the time of such grant or thereafter.

2.25��Performance Unit shall mean any grant pursuant to Section�10 of a unit valued by reference to a designated amount of property (including cash) other than Shares, which value may be paid to the Participant by delivery of such property as the Committee shall determine, including cash, Shares, other property, or any combination thereof, upon achievement of such performance goals during the Performance Period as the Committee shall establish at the time of such grant or thereafter.

2.26��Permitted Assignee shall have the meaning set forth in Section�13.4.

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2.27��Prior Plans shall mean, collectively, the Companys 1996 Stock Option Plan, 2000 Stock Option Plan, 2002 Director Stock Option Plan, and the Director Compensation Stock Plan.

2.28��Restricted Stock shall mean any Share issued with the restriction that the holder may not sell, transfer, pledge or assign such Share and with such other restrictions as the Committee, in its sole discretion, may impose (including any restriction on the right to vote such Share and the right to receive any dividends), which restrictions may lapse separately or in combination at such time or times, in installments or otherwise, as the Committee may deem appropriate.

2.29��Restricted Stock Unit shall mean a bookkeeping entry representing an amount equal to the Fair Market Value of one Share, granted pursuant to Section�8. Each Restricted Stock Unit represents an unfunded and unsecured obligation of the Company.

2.30��Section�409A shall mean Section�409A of the Code, the Treasury Regulations and Internal Revenue Service guidance thereunder, as each may be amended from time to time.

2.31��Shares shall mean the shares of common stock of the Company, par value $0.001 per share.

2.32��Stock Appreciation Right shall mean the right granted to a Participant pursuant to Section�6.

2.33��Subsidiary shall mean any corporation (other than the Company) in an unbroken chain of corporations beginning with the Company if, at the time of the granting of the Award, each of the corporations other than the last corporation in the unbroken chain owns stock possessing 50% or more of the total combined voting power of all classes of stock in one of the other corporations in the chain.

2.34��Substitute Awards shall mean Awards granted or Shares issued by the Company in assumption of, or in substitution or exchange for, awards previously granted, or the right or obligation to make future awards, by a company acquired by the Company or any Subsidiary or with which the Company or any Subsidiary combines.

2.35��Tandem Stock Appreciation Right shall have the meaning set forth in Section�6.1.

2.36��Vesting Period shall mean the period of time specified by the Committee during which vesting restrictions for an Award are applicable.

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3.��SHARES SUBJECT TO THE PLAN

3.1��Number of Shares. Subject to adjustment as provided in Section�13.2, the maximum number of Shares authorized and available for grant under the Plan shall be equal to 14,541,477 Shares.

3.2��Lapsed Awards. If, after December 17, 2009, any Shares subject to an Award or to an award under the Prior Plans are forfeited or expire, or any Award or award under the Prior Plans is settled for cash, the Shares subject to such Award or to such award under the Prior Plans shall, to the extent of such forfeiture, expiration or cash settlement, again be available for Awards under the Plan. Notwithstanding anything to the contrary contained herein, the following Shares shall not be added to the Shares authorized for grant under Section�3.1: (a)�Shares tendered by the Participant or withheld by the Company in payment of the purchase price of an Option or an option granted under the Prior Plans, or to satisfy any tax withholding obligation with respect to an Option or Stock Appreciation Right or options or stock appreciation rights granted under the Prior Plans, and (b)�Shares subject to a Stock Appreciation Right or stock appreciation right granted under the Prior Plans that are not issued in connection with its stock settlement on exercise thereof, and (c)�Shares reacquired by the Company on the open market or otherwise using cash proceeds from the exercise of Options or options granted under the Prior Plans.

3.3��Substitute Awards. Substitute Awards may be issued under the Plan and such Substitute Awards shall not reduce the Shares authorized for grant under the Plan or the numerical limitations applicable to a Participant under Section�11.6, nor shall Shares subject to a Substitute Award again be available for Awards under the Plan to the extent of any forfeiture, expiration or cash settlement as provided in Section�3.2 above. Additionally, in the event that a company acquired by the Company or any Subsidiary or with which the Company or any Subsidiary combines has shares available under a pre-existing plan approved by shareholders and not adopted in contemplation of such acquisition or combination, the shares available for grant pursuant to the terms of such pre-existing plan (as adjusted, to the extent appropriate, using the exchange ratio or other adjustment or valuation ratio or formula used in such acquisition or combination to determine the consideration payable to the holders of common stock of the entities party to such acquisition or combination) may be used for Awards under the Plan and shall not reduce the Shares authorized for grant under the Plan; provided that Awards using such available shares shall not be made after the date awards or grants could have been made under the terms of the pre-existing plan, absent the acquisition or combination, and shall only be made to individuals who were not Employees or Directors prior to such acquisition or combination.

3.4��Character of Shares. Any Shares issued hereunder may consist, in whole or in part, of authorized and unissued shares or shares purchased in the open market or otherwise.

4.��ELIGIBILITY AND ADMINISTRATION

4.1��Eligibility. Any Employee or Director shall be eligible to be selected as a Participant.

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4.2��Administration. The Plan shall be administered by the Committee. The Committee shall have full power and authority, subject to the provisions of the Plan and subject to such orders or resolutions not inconsistent with the provisions of the Plan as may from time to time be adopted by the Board, to:

4.2.1��determine the Fair Market Value;

4.2.2��select the Employees and Directors to whom Awards may from time to time be granted hereunder;

4.2.3��determine the type or types of Awards, not inconsistent with the provisions of the Plan, to be granted to each Participant hereunder;

4.2.4��determine the number of Shares to be covered by each Award granted hereunder;

4.2.5��approve forms of Award Agreements for use under the Plan;

4.2.6��determine the terms and conditions, not inconsistent with the provisions of the Plan, of any Award granted hereunder. Such terms and conditions include, but are not limited to, the exercise price, the time or times when Awards may be exercised (which may be based on performance criteria), any vesting acceleration or waiver of forfeiture restrictions, and any restriction or limitation regarding any Award or the Shares relating thereto, based in each case on such factors as the Committee will determine;

4.2.7��determine whether, to what extent and under what circumstances Awards may be settled in cash, Shares or other property, subject to the terms of the Plan;

4.2.8��determine whether, to what extent, and under what circumstances cash, Shares, other property and other amounts payable with respect to an Award made under the Plan shall be deferred, in compliance with applicable laws (including but not limited to Section�409A), either automatically or at the election of the Participant;

4.2.9��determine whether, to what extent and under what circumstances any Award shall be reduced, canceled, suspended or subject to recoupment in addition to any otherwise applicable vesting or performance conditions of an Award, as may be specified in an Award Agreement at the time of the Award, or later if (a)�the Company later adopts a policy requiring such reduction, cancellation, forfeiture or recoupment, or (b)�pursuant to an amendment of an outstanding Award;

4.2.10��interpret and administer the Plan and any instrument or agreement entered into under or in connection with the Plan, including any Award Agreement;

4.2.11��correct any defect, supply any omission or reconcile any inconsistency in the Plan or any Award in the manner and to the extent that the Committee shall deem desirable to carry it into effect;

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4.2.12��modify or amend each Award (subject to Section�13.1);

4.2.13��allow Participants to satisfy tax withholding obligations in such manner as prescribed in Section�14.2 of the Plan;

4.2.14��establish such rules and regulations and appoint such agents as it shall deem appropriate for the proper administration of the Plan and any subplans established for the purpose of satisfying applicable non-U.S. laws and/or for qualifying for favorable tax treatment under applicable nonU.S. laws;

4.2.15��authorize any person to execute on behalf of the Company any instrument required to effect the grant of an Award previously granted by the Committee pursuant to such procedures as the Committee may determine;

4.2.16��impose such restrictions, conditions or limitations as it determines appropriate as to the timing and manner of any resales by a Participant or other subsequent transfers by the Participant of any Shares issued as a result of or under an Award, including without limitation, (a)�restrictions under an insider trading policy, and (b)�restrictions as to the use of a specified brokerage firm for such resales or other transfers; and

4.2.17��make any other determination and take any other action that the Committee deems necessary or desirable for administration of the Plan.

4.3��Decisions of the Committee shall be final, conclusive and binding on all persons or entities, including the Company, any Participant, and any Subsidiary and shall be given the maximum deference permitted by law. Notwithstanding the foregoing or anything else to the contrary in the Plan, any action or determination by the Committee specifically affecting or relating to an Award to a Director shall require the prior approval of the Board.

4.4��Different Committees with respect to different Participants may administer the Plan. To the extent not inconsistent with applicable law, including Section�162(m) of the Code, or the rules and regulations of the NASDAQ Stock Market, the Committee may delegate to (a)�a committee of one or more directors of the Company any of the authority of the Committee under the Plan, including the right to grant, cancel or suspend Awards, and (b)�to the extent permitted by law, to one or more executive officers or a committee of executive officers the right to grant Awards to Employees who are not Directors or executive officers of the Company and the authority to take action on behalf of the Committee pursuant to the Plan to cancel or suspend Awards to Employees who are not Directors or executive officers of the Company. Such delegations may be revoked at any time.

5.��OPTIONS

5.1��Grant of Options. Options may be granted hereunder to Participants either alone or in addition to other Awards granted under the Plan. Any Option shall be subject to the terms

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and conditions of this Section�5 and to such additional terms and conditions, not inconsistent with the provisions of the Plan, as the Committee shall deem desirable.

5.2��Award Agreements. All Options granted pursuant to this Section�5 shall be evidenced by an Award Agreement in such form and containing such terms and conditions as the Committee shall determine which are not inconsistent with the provisions of the Plan. The terms of Options need not be the same with respect to each Participant. Granting of an Option pursuant to the Plan shall impose no obligation on the recipient to exercise such Option. Any individual who is granted an Option pursuant to this Section�5 may hold more than one Option granted pursuant to the Plan at the same time.

5.3��Option Price. Other than in connection with Substitute Awards, the option price per each Share purchasable under any Option granted pursuant to this Section�5 shall not be less than 100% of the Fair Market Value of such Share on the date of grant of such Option. Other than pursuant to Section�13.2, the Committee shall not without the approval of the Companys shareholders (a)�lower the option price per Share of an Option after it is granted, (b)�cancel an Option in exchange for cash or another Award other than in connection with Substitute Awards or a Change of Control, and (c)�take any other action with respect to an Option that would be treated as a repricing under the rules and regulations of the NASDAQ Stock Market.

5.4��Option Term. The term of each Option shall be fixed by the Committee in its sole discretion; provided that no Option shall be exercisable after the expiration of seven (7) years from the date the Option is granted, except in the event of death or disability.

5.5��Exercise of Options.

5.5.1��Exercise. Any Option granted hereunder will be exercisable according to the terms of the Plan and at such times or under such conditions as determined by the Committee and set forth in the Award Agreement. An Option will be deemed exercised by the Participant or by a Permitted Assignee thereof (or by the Participants executors, administrators, guardian or legal representative, as may be provided in an Award Agreement) as to all or part of the Shares covered thereby, when the Company or its designated agent receives a notice of exercise (in such form as the Committee may specify from time to time) specifying the number of Shares to be purchased, accompanied by payment of the full purchase price for the Shares being purchased. The Committee will determine the acceptable form of consideration for exercising the Option, including the method of payment. In the case of an Incentive Stock Option, the Committee will determine the acceptable form of consideration at the time of grant. Unless otherwise provided in an Award Agreement, full payment of the purchase price shall be made at the time of exercise and shall be made (a)�in cash or cash equivalents (including certified check or bank check or wire transfer of immediately available funds), (b)�by tendering previously acquired Shares (either actually or by attestation), valued at their then Fair Market Value and provided that accepting such Shares will not result in any adverse accounting consequences to the Company, as the Committee determines in its sole discretion, (c)�with the consent of the Committee, by delivery of other consideration (including, where permitted by law and the Committee, other Awards) having a Fair Market Value on the exercise date equal to the total purchase price, (d)�with the consent of the Committee, by withholding Shares

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otherwise issuable in connection with the exercise of the Option, (e)�with the consent of the Committee, consideration received by the Company under a cashless exercise program (whether through a broker, net exercise program or otherwise) implemented by the Company in connection with the Plan, (f)�with the consent of the Committee, by net exercise, (g)�through any other method to the extent permitted by applicable law and specified in an Award Agreement, or (h)�any combination of any of the foregoing. The notice of exercise, accompanied by such payment, shall be delivered to the Company at its principal business office or such other office as the Committee may from time to time direct, and shall be in such form, containing such further provisions consistent with the provisions of the Plan, as the Committee may from time to time prescribe. In no event may any Option granted hereunder be exercised for a fraction of a Share. No adjustment shall be made for cash dividends or other rights for which the record date is prior to the date of such issuance. Exercising an Option in any manner will decrease the number of Shares thereafter available, both for purposes of the Plan and for sale under the Option, by the number of Shares as to which the Option is exercised.

5.5.2��Automatic Exercise. Notwithstanding the foregoing, an Award Agreement may provide that if on the last day of the term of an Option the Fair Market Value of one Share exceeds the option price per Share, the Participant has not exercised the Option or a Tandem Stock Appreciation Right (if applicable) and the Option has not expired, the Option shall be deemed to have been exercised by the Participant on such day with payment made by withholding Shares otherwise issuable in connection with the exercise of the Option. In such event, the Company shall deliver to the Participant the number of Shares for which the Option was deemed exercised, less the number of Shares required to be withheld for the payment of the total purchase price and required withholding taxes; provided, however, any fractional Share shall be settled in cash, rounded down to the nearest $.01.

5.6��Form of Settlement. In its sole discretion, the Committee may provide, at the time of grant, that the Shares to be issued upon an Options exercise shall be in the form of Restricted Stock or other similar securities, or may reserve the right so to provide after the time of grant.

5.7��Incentive Stock Options. The Committee may grant Incentive Stock Options to any employee of the Company or any Subsidiary, subject to the requirements of Section�422 of the Code. Each Option will be designated in the Award Agreement as either an Incentive Stock Option or a Nonstatutory Stock Option. However, notwithstanding such designation, to the extent that the aggregate Fair Market Value of the Shares with respect to which Incentive Stock Options are exercisable for the first time by the Participant during any calendar year (under all plans of the Company and any Subsidiary or parent of the Company) exceeds one hundred thousand dollars ($100,000), such Options will be treated as Nonstatutory Stock Options. For purposes of this Section�5.7, Incentive Stock Options will be taken into account in the order in which they were granted. The Fair Market Value of the Shares will be determined as of the time the Option with respect to such Shares is granted. Further, notwithstanding anything in Section�3.1 to the contrary and solely for the purposes of determining whether Shares are available for the grant of Incentive Stock Options under the Plan, the maximum aggregate number of Shares with respect to which

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Incentive Stock Options may be granted under the Plan shall be 5,000,000 Shares. In addition, and notwithstanding anything in this Section�5 to the contrary, if an Incentive Stock Option is granted to a Participant who at the time such grant owns (within the meaning of Section�422 of the Code) stock possessing more than 10% of the total combined voting power of all classes of stock of the Company or of its parent corporation or of any Subsidiary (a)�the option price per Share under the Incentive Stock Option shall be not less than 110% of the Fair Market Value of a Share on the date of grant of the Incentive Stock Option and (b)�such Incentive Stock Option shall expire and no longer be exercisable no later than 5 years from the date of grant.

5.8��Termination of Relationship as Employee or Director. If a Participant ceases to provide services as an Employee or Director, other than upon the Participants service termination as the result of the Participants death or Disability, the Participant may exercise his or her Option within such period of time as is specified in the Award Agreement to the extent that the Option is vested on the date of termination (but in no event later than the expiration of the term of such Option as set forth in the Award Agreement). In the absence of a specified time in the Award Agreement, the Option will remain exercisable for three (3) months following the Participants termination. Unless otherwise provided by the Committee, if on the date of termination the Participant is not vested as to his or her entire Option, the Shares covered by the unvested portion of the Option will revert to the Plan. If after termination the Participant does not exercise his or her Option within the time specified by the Committee, subject to Section�5.5.2, the Option will terminate, and the Shares covered by such Option will revert to the Plan.

5.9��Disability of Employee or Director. If a Participant ceases to be an Employee or Director as a result of the Participants Disability, the Participant may exercise his or her Option within such period of time as is specified in the Award Agreement to the extent the Option is vested on the date of termination (but in no event later than the expiration of the term of such Option as set forth in the Award Agreement). In the absence of a specified time in the Award Agreement, the Option will remain exercisable for twelve (12) months following the Participants termination. Unless otherwise provided by the Committee, if on the date of termination the Participant is not vested as to his or her entire Option, the Shares covered by the unvested portion of the Option will revert to the Plan. If after termination the Participant does not exercise his or her Option within the time specified herein, subject to Section�5.5.2, the Option will terminate, and the Shares covered by such Option will revert to the Plan.

5.10��Death of Participant. If a Participant dies while a Service Provider, the Option may be exercised following the Participants death within the period of time as is specified in the applicable Award Agreement to the extent that the Option is vested on the date of death (but in no event may the Option be exercised later than the expiration of the term of the Option as set forth in the applicable Award Agreement), by the Participants designated beneficiary, provided the beneficiary has been designated prior to Participants death in a form acceptable to the Committee. If no such beneficiary has been designated by the Participant, then the Option may be exercised by the personal representative of the Participants estate or by the person(s) to whom the Option is transferred pursuant to the Participants will or in accordance with the laws of descent and distribution. In the absence of a specified time in the Award Agreement, the Option will remain

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exercisable for twelve (12) months following Participants death. Unless otherwise provided by the Committee, if at the time of death, the Participant is not vested as to his or her entire Option, the Shares covered by the unvested portion of the Option immediately will revert to the Plan. If the Option is not so exercised within the time specified herein, subject to Section�5.5.2, the Option will terminate, and the Shares covered by the Option will revert to the Plan.

6.��STOCK APPRECIATION RIGHTS

6.1��Grant and Exercise. The Committee may provide Stock Appreciation Rights to an Employee or Director (a)�in conjunction with all or part of any Option granted under the Plan or at any subsequent time during the term of such Option (Tandem Stock Appreciation Right), (b)�in conjunction with all or part of any Award (other than an Option) granted under the Plan or at any subsequent time during the term of such Award, or (c)�without regard to any Option or other Award (a Freestanding Stock Appreciation Right), in each case upon such terms and conditions as the Committee may establish in its sole discretion.

6.2��Terms and Conditions. Stock Appreciation Rights shall be evidenced by an Award Agreement and be subject to such terms and conditions, not inconsistent with the provisions of the Plan, as shall be determined from time to time by the Committee, including the following:

6.2.1��Amount of Payment. Upon the exercise of a Stock Appreciation Right, the holder shall have the right to receive for each exercised Share under the Award, the excess of (i)�the Fair Market Value of one Share on the date of exercise (or such other amount less than such Fair Market Value as the Committee shall so determine at any time during a specified period before the date of exercise) over (ii)�the per Share grant price of the Stock Appreciation Right as specified by the Committee in its sole discretion, which per Share grant price, except in the case of Substitute Awards or in connection with an adjustment provided in Section�13.2, shall not be less than the Fair Market Value of one Share on such date of grant or, if applicable, the exercise price of the related Option with respect to a Tandem Stock Appreciation Right granted subsequent to the related Option (subject to the requirements of Section�409A).

6.2.2��Form of Payment. The Committee shall determine in its sole discretion whether payment shall be made in cash, in whole Shares or other property, or any combination thereof.

6.2.3��Tandem Stock Appreciation Rights.

6.2.3.1��Any Tandem Stock Appreciation Right may be granted at the same time as the related Option is granted or at any time thereafter before exercise or expiration of such Option.

6.2.3.2��Any Tandem Stock Appreciation Right related to an Option may be exercised only when the related Option would be exercisable and the Fair Market Value of a Share subject to the related Option exceeds the option price at which a Share can be acquired pursuant to the Option. In addition, if a Tandem Stock Appreciation Right exists with respect to less

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than the full number of Shares covered by a related Option, then an exercise or termination of such Option shall not reduce the number of Shares to which the Tandem Stock Appreciation Right applies until the number of Shares then exercisable under such Option equals the number of Shares to which the Tandem Stock Appreciation Right applies.

6.2.3.3��Any Option related to a Tandem Stock Appreciation Right shall no longer be exercisable to the extent the Tandem Stock Appreciation Right has been exercised.

6.2.3.4��The exercise price of a Tandem Stock Appreciation Right may be less than the Fair Market Value on the date of grant if the Tandem Stock Appreciation Right is added to an Option following the date of the grant of the Option (subject to the requirements of Section�409A).

6.3��Freestanding Stock Appreciation Rights. Subject to Section�13.2, a Freestanding Stock Appreciation Right generally shall have the same terms and conditions as Options, including (a)�a per Share exercise price not less than Fair Market Value of one Share on the date of grant or, if applicable, on the date of grant of an Option with respect to a Freestanding Stock Appreciation Right granted in exchange for an Option (subject to the requirements of Section�409A) except in the case of Substitute Awards or in connection with an adjustment provided in Section�13.2, (b)�a term not greater than seven (7) years, and (c)�the exercisability provisions set forth in Sections�5.8 through�5.10.

6.4��Automatic Exercise. An Award Agreement may provide that if on the last day of the term of a Stock Appreciation Right the Fair Market Value of one Share exceeds the exercise price per Share of the Stock Appreciation Right, the Participant has not exercised the Stock Appreciation Right or the tandem Option (if applicable), and neither the Stock Appreciation Right nor the Option has expired, the Stock Appreciation Right shall be deemed to have been exercised by the Participant on such day. In such event, the Company shall make payment to the Participant in accordance with this Section�6, reduced by the number of Shares (or cash) required for withholding taxes; any fractional Share shall be settled in cash, rounded down to the nearest $.01.

6.5��No Repricing of Stock Appreciation Rights. Without the approval of the Companys shareholders, other than pursuant to Section�13.2, the Committee shall not (a)�reduce the grant price of any Stock Appreciation Right after the date of grant (b)�cancel any Stock Appreciation Right in exchange for cash or another Award (other than in connection with a Change of Control, as defined in Section�2.4, or a Substitute Award), or (c)�take any other action with respect to a Stock Appreciation Right that would be treated as a repricing under the rules and regulations of the NASDAQ Stock Market.

6.6��Other Terms and Conditions. The provisions of Stock Appreciation Rights need not be the same with respect to each Participant. The Committee may impose such terms and conditions on Stock Appreciation Rights, including such conditions or restrictions on the terms of exercise and the exercise price of any Stock Appreciation Right, as the Committee shall determine in its sole discretion.

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7.��RESTRICTED STOCK

7.1��Grants. Awards of Restricted Stock may be issued hereunder to Participants either alone or in addition to other Awards granted under the Plan, and such Restricted Stock Awards shall also be available as a form of payment of Performance Awards and other earned cash-based incentive compensation. A Restricted Stock Award shall be subject to vesting restrictions during the Vesting Period as specified by the Committee. The Committee has absolute discretion to determine whether any consideration (other than services) is to be received by the Company or any Subsidiary as a condition precedent to the issuance of Restricted Stock.

7.2��Award Agreements. The terms of any Restricted Stock Award granted under the Plan shall be set forth in an Award Agreement which shall contain provisions determined by the Committee and not inconsistent with the Plan. The terms of Restricted Stock Awards need not be the same with respect to each Participant.

7.3��Rights of Holders of Restricted Stock. Unless otherwise provided in the Award Agreement, beginning on the date of grant of the Restricted Stock Award and subject to execution of the Award Agreement, a Participant holding Shares of Restricted Stock granted under the Plan may exercise full voting rights with respect to those Shares and will be entitled to receive all dividends and other distributions paid with respect to such Shares. Except as otherwise provided in an Award Agreement, any Shares or any other property (other than cash) distributed as a dividend or otherwise with respect to any Restricted Stock Award as to which the restrictions have not yet lapsed shall be subject to the same restrictions as such Restricted Stock Award. Notwithstanding the provisions of this Section�7.3, cash dividends with respect to any Restricted Stock Award and any other property (other than cash) distributed as a dividend or otherwise with respect to any Restricted Stock Award that vests based on achievement of performance goals shall be subject to restrictions and risk of forfeiture to the same extent as the Restricted Stock with respect to which such cash, Shares or other property has been distributed.

7.4��Issuance of Shares. Any Restricted Stock granted under the Plan may be evidenced in such manner as the Committee may deem appropriate, including book-entry registration or issuance of a stock certificate or certificates, which certificate or certificates shall be held by the Company as escrow agent until the restrictions on the Shares of Restricted Stock have lapsed. Such certificate or certificates shall be registered in the name of the Participant and shall bear an appropriate legend referring to the restrictions applicable to such Restricted Stock. Except as otherwise provided in this Section�7, Shares of Restricted Stock covered by each Restricted Stock Award granted under the Plan will be released from escrow as soon as practicable after the last day on which the Award remained subject to restrictions, or at such other time as the Committee may determine. The Committee may, in its sole discretion, subject to the limitations imposed under Section�162(m) of the Code and the regulations thereunder in the case of a Restricted Stock Award intended to comply with the performance-based exception under Code Section�162(m), waive the forfeiture period and any other conditions set forth in any Award Agreement subject to such terms and conditions as the Committee shall deem appropriate.

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7.5��Return of Restricted Stock to Company. On the date set forth in the Award Agreement, the Restricted Stock for which restrictions have not lapsed will revert to the Company and, subject to Section�3, again will become available for grant under the Plan.

8.��RESTRICTED STOCK UNITS

8.1��Grants. Subject to the terms and provisions of the Plan, the Committee, at any time and from time to time, may grant Restricted Stock Units to Participants in such amounts as the Committee, in its sole discretion, will determine. After the Committee determines that it will grant Restricted Stock Units under the Plan, it will advise the Participant in an Award Agreement of the terms, conditions, and restrictions related to the grant (as determined by the Committee and not inconsistent with the Plan), including the number of Restricted Stock Units and whether such Awards shall have Dividend Equivalents pursuant to Section�13.6.

8.2��Vesting Criteria and Other Terms. The Committee will set vesting criteria in its discretion, which, depending on the extent to which the criteria are met, will determine the number of Restricted Stock Units that will be paid out to the Participant. The Committee may set vesting criteria based upon continued employment or service, the achievement of specific performance objectives (Company-wide, departmental, divisional, business unit, or individual goals (including, but not limited to, continued employment or service), applicable federal or state securities laws or any other basis determined by the Committee in its discretion.

8.3��Earning Restricted Stock Units. Upon meeting the applicable vesting criteria, the Participant will be entitled to receive a payout as determined by the Committee. Notwithstanding the foregoing, at any time after the grant of Restricted Stock Units, the Committee, in its sole discretion, subject to the limitations imposed under Section�162(m) of the Code and the regulations thereunder in the case of a Restricted Stock Award intended to comply with the performance-based exception under Code Section�162(m), may reduce or waive any vesting criteria that must be met to receive a payout.

8.4��Form and Timing of Payment. Payment of earned Restricted Stock Units will be made as soon as practicable after the date(s) determined by the Committee and set forth in the Award Agreement; provided, however, that the timing of payment shall in all cases comply with Section�409A to the extent applicable to the Award. The Committee, in its sole discretion, may settle earned Restricted Stock Units in cash, Shares, other property, or a combination thereof.

8.5��Cancellation. On the date set forth in the Award Agreement, all unearned Restricted Stock Units will be forfeited to the Company and, subject to Section�3, again will become available for grant under the Plan.

9.��OTHER SHARE-BASED AWARDS

9.1��Grants. Other Awards of Shares and other Awards valued in whole or in part by reference to, or are otherwise based on, Shares or other property (collectively Other Share-Based Awards), including deferred stock units, may be granted hereunder to Participants. Other

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Share-Based Awards shall also be available as a form of payment of other Awards granted under the Plan and other earned cash-based compensation (including Directors fees). Prior to granting any Other Share-Based Awards to be settled upon a Change of Control, the Committee shall consider the implications of Section�409A on, and take any action or adopt any provision with respect to, such Other Share-Based Award that it deems necessary or appropriate in its sole discretion.

9.2��Award Agreements. The terms of Other Share-Based Awards granted under the Plan shall be set forth in an Award Agreement, or in a sub-plan forming part of the Plan, which shall contain provisions determined by the Committee and not inconsistent with the Plan. The terms of such Awards need not be the same with respect to each Participant. Notwithstanding the provisions of this Section�9, any property (other than cash) distributed as a dividend or otherwise with respect to the number of Shares covered by an Other Share-Based Award that vests based on achievement of performance goals shall be subject to restrictions and risk of forfeiture to the same extent as the Shares covered by such Award with respect to which such cash, Shares or other property has been distributed. Other Share-Based Awards may be subject to vesting restrictions during the Vesting Period as specified by the Committee.

9.3��Payment. Except as provided in Section�11 or as may be provided in an Award Agreement, Other Share-Based Awards may be paid in cash, Shares, other property, or any combination thereof, in the sole discretion of the Committee at the time of payment. Other Share-Based Awards may be paid in a lump sum or in installments or, in accordance with procedures established by the Committee, on a deferred basis subject to the requirements of Section�409A.

9.4��Deferral of Director Fees and Other Compensation. Directors shall, if determined by the Board, receive Other Share-Based Awards in the form of deferred stock units in lieu of all or a portion of their annual retainer. In addition, to the extent permitted by the Committee, (a)�Directors may elect to receive Other Share-Based Awards in the form of deferred stock units in lieu of all or a portion of their annual and committee retainers and annual meeting fees, and (b)�Employees may elect to receive Other Share-Based Awards in the form of deferred stock units in lieu of all or a portion of their compensation for services to the Company. The Committee shall, in its absolute discretion, establish such rules and procedures as it deems appropriate for such elections and for the payment of the deferred stock units, including (but not limited to) with respect to the requirements of Section�409A.

9.5��Cancellation of Performance Awards. On the date set forth in the Award Agreement, all unearned or unvested Performance Awards will be forfeited to the Company, and, subject to Section�3, again will be available for grant under the Plan.

10.��PERFORMANCE AWARDS

10.1��Grants. Performance Awards in the form of Performance Shares or Performance Units, as determined by the Committee in its sole discretion, may be granted hereunder to Participants, for no consideration or for such minimum consideration as may be required by applicable law, either alone or in addition to other Awards granted under the Plan. The performance

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goals to be achieved for each Performance Period shall be conclusively determined by the Committee and may be based upon the criteria set forth in Section�11.2.

10.2��Value of Performance Units/Shares. Each Performance Unit will have an initial value that is established by the Committee on or before the date of grant. Each Performance Share will have an initial value equal to the Fair Market Value of a Share on the date of grant.

10.3��Award Agreements. The terms of any Performance Award granted under the Plan shall be set forth in an Award Agreement which shall contain provisions determined by the Committee and not inconsistent with the Plan, including whether such Awards shall have Dividend Equivalents (subject to the requirements of Section�13.6). The terms of Performance Awards need not be the same with respect to each Participant.

10.4��Terms and Conditions. The performance criteria to be achieved during any Performance Period and the length of the Performance Period shall be determined by the Committee upon the grant of each Performance Award. The Committee may set vesting criteria based upon continued employment or service, the achievement of specific performance objectives (Company-wide, departmental, divisional, business unit, or individual goals (including, but not limited to, continued employment or service), applicable federal or state securities laws or any other basis determined by the Committee in its discretion. After the applicable Performance Period has ended, the holder of Performance Units/Shares will be entitled to receive a payout of the number of Performance Units/Shares earned by the Participant over the Performance Period, to be determined as a function of the extent to which the corresponding performance objectives or other vesting provisions have been achieved. The amount of the Award to be distributed shall be conclusively determined by the Committee.

10.5��Payment. Except as provided in Section�11 or as may be provided in an Award Agreement, Performance Awards will be distributed only after the end of the relevant Performance Period. Performance Awards may be paid in cash, Shares, other property, or any combination thereof, in the sole discretion of the Committee at the time of payment. Performance Awards may be paid in a lump sum or in installments following the close of the Performance Period or, in accordance with procedures established by the Committee, on a deferred basis subject to the requirements of Section�409A.

11.��CODE SECTION�162(m) PROVISIONS

11.1��Covered Employees. The purpose of this Section�11 is to provide the Committee the ability to qualify Awards (other than Options and Stock Appreciation Rights) that are granted pursuant to the Plan as qualified performance-based compensation under Section�162(m) of the Code. If the Committee, in its discretion, decides to grant a Performance-Based Award to a Covered Employee, the provisions of this Section�11 will control over any contrary provision in the Plan; provided, however, that the Committee may in its discretion grant other Awards to such Covered Employees that are based on performance goals or other specific criteria or goals but that do not satisfy the requirements of this Section�11. The designation of a Covered Employee as being subject to Section�162(m) of the Code will not in any manner entitle the Covered Employee to

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receive an Award under the Plan. Moreover, designation of a Covered Employee subject to Section�162(m) of the Code for a particular Performance Period will not require designation of such Covered Employee in any subsequent Performance Period and designation of one Covered Employee will not require designation of any other Covered Employee in such period or in any other period. Unless otherwise provided in the applicable Award Agreement, a Covered Employee must be employed by the Company or its Subsidiary on the day a Performance-Based Award for a Performance Period is paid to the Covered Employee.

11.2��Performance Criteria. If the Committee determines that a Restricted Stock Award, Performance Award, Restricted Stock Unit Award or Other Share-Based Award is subject to this Section�11, the lapsing of restrictions thereon and the distribution of cash, Shares or other property pursuant thereto, as applicable, shall be subject to the achievement of one or more objective Performance Goals established by the Committee, which shall be based on the attainment of specified levels of one or any combination of the Performance Goals. Such Performance Goals may be based solely by reference to the Companys performance or the performance of a Subsidiary, division, business segment or business unit of the Company, or based upon the relative performance of other companies or upon comparisons of any of the indicators of performance relative to other companies. The Committee may also exclude the impact of an event or occurrence which the Committee determines should appropriately be excluded, including (a)�restructurings, discontinued operations, extraordinary items, and other unusual or non-recurring charges, (b)�an event either not directly related to the operations of the Company or not within the reasonable control of the Companys management, or (c)�the cumulative effects of tax or accounting changes in accordance with generally accepted accounting principles. Such Performance Goals shall be set by the Committee within the time period prescribed by, and shall otherwise comply with the requirements of, Section�162(m) of the Code, and the regulations thereunder.

11.3��Procedures. To the extent necessary to comply with the performance-based compensation requirements of Section�162(m) of the Code, with respect to any Award granted subject to Performance Goals, the Committee will, in writing and no later than the Determination Date, (a)�designate one or more Participants who are Covered Employees, (b)�select the Performance Goals applicable to the Performance Period, (c)�establish the Performance Goals, and amounts or methods of computation of such Awards, as applicable, which may be earned for such Performance Period, and (d)�specify the relationship between Performance Goals and the amounts or methods of computation of such Awards, as applicable, to be earned by each Covered Employee for such Performance Period. Following the completion of each Performance Period, the Committee will certify in writing whether the applicable Performance Goals have been achieved for such Performance Period.

11.4��Adjustments. Notwithstanding any provision of the Plan (other than Section�12), with respect to any Award that is subject to this Section�11, the Committee may adjust downwards, but not upwards, the amount payable pursuant to such Award, and the Committee may not waive the achievement of the applicable Performance Goals, unless otherwise permitted by Section�162(m) of the Code.

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11.5��Restrictions. The Committee shall have the power to impose such other restrictions on Awards subject to this Section�11 as it may deem necessary or appropriate to ensure that such Awards satisfy all requirements for performance-based compensation within the meaning of Section�162(m) of the Code. Notwithstanding any other provision of the Plan, any Award which is granted to a Covered Employee and is intended to constitute qualified performancebased compensation under Section�162(m) of the Code will be subject to any additional limitations set forth in the Code (including any amendment to Section�162(m)) or any regulations and ruling issued thereunder that are requirements for qualification as qualified performance-based compensation as described in Section�162(m) of the Code, and the Plan will be deemed amended to the extent necessary to conform to such requirements.

11.6��Limitations on Grants to Individual Participant.

11.6.1��Section�162(m) Limitations. Subject, in each case, to adjustment as provided in Section�13.2, the Company may grant (a)�Options or Stock Appreciation Rights during any 12-month period to a Participant for up to a maximum of 2,000,000 Shares and (b)�up to a maximum of an additional 900,000 Shares with respect to Restricted Stock Awards, Performance Awards, Restricted Stock Unit Awards and/or Other Share-Based Awards during any 12-month period that are intended to comply with the performance-based exception under Code Section�162(m) and are denominated in Shares (collectively, the Share-Based Limitations). In addition to the foregoing Share-Based Limitations, a Participant may receive up to an additional $3,000,000 during any 12-month period with respect to Performance Awards that are intended to comply with the performance-based exception under Code Section�162(m) and are denominated in cash (the Cash-Based Limitation, and collectively with the Share-Based Limitations, the Limitations). If an Award is cancelled, the cancelled Award shall continue to be counted toward the applicable Limitations.

11.6.2��Director Limitations. Notwithstanding the foregoing in Section�11.6.1 and subject in each case to adjustments as provided in Section�13.2, the Company, during any 12-month period, may grant to a Director (a)�Options or Stock Appreciation Rights for up to a maximum of 650,000 Shares and (b)�up to a maximum of an additional 300,000�Shares with respect to Restricted Stock Awards, Performance Awards, Restricted Stock Unit Awards and/or Other Share-Based Awards that are denominated in Shares. In addition, a Director may receive up to an additional $1,000,000 during any 12month period with respect to Performance Awards that are denominated in cash.

12.��CHANGE OF CONTROL PROVISIONS

12.1��Impact on Certain Awards. Award Agreements may provide that in the event of a Change of Control, (a)�Options and Stock Appreciation Rights outstanding as of the date of the Change of Control immediately vest and become fully exercisable, (b)�that Options and Stock Appreciation Rights outstanding as of the date of the Change of Control may be cancelled and terminated without payment therefor if the Fair Market Value of one Share as of the date of the Change of Control is less than the per Share Option exercise price or Stock Appreciation Right grant price, (c)�restrictions and deferral limitations on Restricted Stock lapse and the Restricted Stock

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becomes free of all restrictions and limitations and becomes fully vested, (d)�all Performance Awards shall be considered to be earned and payable (either in full or pro rata based on the portion of Performance Period completed as of the date of the Change of Control), and any limitations or other restrictions shall lapse and such Performance Awards shall be immediately settled or distributed, and (e)�the restrictions and deferral limitations and other conditions applicable to any Other Share-Based Awards, Restricted Stock Unit Awards, or any other Awards shall lapse, and such Other Share-Based Awards, Restricted Stock Unit Awards, or such other Awards shall become free of all restrictions, limitations or conditions and become fully vested.

12.2��Assumption or Substitution of Certain Awards.

12.2.1��Unless otherwise provided in an Award Agreement, in the event of a Change of Control of the Company of which the successor company assumes or substitutes for an Option, Stock Appreciation Right, Restricted Stock Award, Restricted Stock Unit Award, or Other Share-Based Award (or in which the Company is the ultimate parent corporation and continues the Award), then each outstanding Option, Stock Appreciation Right, Restricted Stock Award, Restricted Stock Unit Award, or Other Share-Based Award shall not be accelerated as described in Sections�12.1(a), (c) and (e). For the purposes of this Section�12.2, an Option, Stock Appreciation Right, Restricted Stock Award, Restricted Stock Unit Award, or Other Share-Based Award shall be considered assumed or substituted for if following the Change of Control the Award confers the right to purchase or receive, for each Share subject to the Option, Stock Appreciation Right, Restricted Stock Award, Restricted Stock Unit Award, or Other Share-Based Award immediately prior to the Change of Control, the consideration (whether stock, cash or other securities or property) received in the transaction constituting a Change of Control by holders of Shares for each Share held on the effective date of such transaction (and if holders were offered a choice of consideration, the type of consideration chosen by the holders of a majority of the outstanding Shares); provided, however, that if such consideration received in the transaction constituting a Change of Control is not solely common stock of the successor company, the Committee may, with the consent of the successor company, provide that the consideration to be received upon the exercise or vesting of an Option, Stock Appreciation Right, Restricted Stock Award, Restricted Stock Unit Award, or Other Share-Based Award, for each Share subject thereto, will be solely common stock of the successor company substantially equal in fair market value to the per Share consideration received by holders of Shares in the transaction constituting a Change of Control. The determination of such substantial equality of value of consideration shall be made by the Committee in its sole discretion and its determination shall be conclusive and binding. Notwithstanding the foregoing, on such terms and conditions as may be set forth in an Award Agreement, in the event of a termination of a Participants employment in such successor company within a specified time period following such Change of Control, each Award held by such Participant at the time of the Change of Control shall be accelerated.

12.2.2��The Committee, in its discretion, may determine that, upon the occurrence of a Change of Control of the Company, each Option and Stock Appreciation Right outstanding shall terminate within a specified number of days after notice to the Participant, and/or that each Participant shall receive, with respect to each Share subject to such Option or Stock Appreciation Right, an amount equal to the excess of the Fair Market Value of such Share

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immediately prior to the occurrence of such Change of Control over the exercise price per Share of such Option and/or Stock Appreciation Right; such amount to be payable in cash, in one or more kinds of stock or property (including the stock or property, if any, payable in the transaction) or in a combination thereof, as the Committee, in its discretion, shall determine; provided, however, that if the Fair Market Value of one Share as of the date of the Change of Control is less than the per Share Option exercise price or Stock Appreciation Right grant price, the Committee may, in its discretion, cancel and terminate each such outstanding Option and/or Stock Appreciation Right without payment.

13.��GENERALLY APPLICABLE PROVISIONS

13.1��Amendment and Termination of the Plan. The Board may, from time to time, alter, amend, suspend or terminate the Plan as it shall deem advisable, subject to any requirement for shareholder approval imposed by applicable law, including the rules and regulations of the NASDAQ Stock Market provided that the Board may not amend the Plan in any manner that would result in noncompliance with Rule 16b-3 of the Exchange Act; and further provided that the Board may not, without the approval of the Companys shareholders, amend the Plan to (a)�increase the number of Shares that may be the subject of Awards under the Plan (except for adjustments pursuant to Section�13.2), (b)�expand the types of awards available under the Plan, (c)�materially expand the class of persons eligible to participate in the Plan, (d)�amend Sections�5.3, 6.3, or 6.5 to eliminate the requirements relating to minimum exercise price and shareholder approval, (e)�increase the maximum permissible term of any Option specified by Section�5.4 or the maximum permissible term of a Freestanding Stock Appreciation Right specified in Section�6.3, or (f)�increase the numerical limitations in Section�11.6. The Board may not, without the approval of the Companys shareholders, except as set forth in Section�13.2, (i)�lower, after it is granted, the option price per Share of an Option or the grant price per Share of a Stock Appreciation Right, (ii)�cancel an Option or Stock Appreciation Right in exchange for cash or another Award (other than in connection with Substitute Awards or a Change of Control, as defined in Section�2.4), or (iii)�take any other action with respect to an Option or Stock Appreciation Right that would be treated as a repricing under the rules and regulations of the NASDAQ Stock Market. In addition, no amendments to, or termination of, the Plan shall in any way impair the rights of a Participant under any Award previously granted without such Participants consent. Termination of the Plan will not affect the Committees ability to exercise the powers granted to it hereunder with respect to Awards granted under the Plan prior to the date of such termination.

13.2��Adjustments. In the event of any merger, reorganization, consolidation, recapitalization, dividend or distribution (whether in cash, shares, other securities or other property, other than a regular cash dividend), stock split, reverse stock split, spin-off, splitup, combination, repurchase or exchange of Shares or other securities of the Company, or similar transaction or other change in corporate structure affecting the Shares or the value thereof, such adjustments and other substitutions shall be made to the Plan and to Awards as the Committee deems equitable or appropriate taking into consideration the accounting and tax consequences, including such adjustments in the aggregate number, class and kind of securities that may be delivered under the Plan, the numerical limitations in Section�11.6, the maximum number of shares that may be issued

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pursuant to Incentive Stock Options, and in the number, class, kind and option or exercise price of securities subject to outstanding Awards granted under the Plan (including, if the Committee deems appropriate, the substitution of similar options to purchase the shares of, or other awards denominated in the shares of, another company) as the Committee may determine to be appropriate in its sole discretion; provided, however, that the number of Shares subject to any Award shall always be a whole number.

13.3��Dissolution or Liquidation. In the event of the proposed dissolution or liquidation of the Company, the Committee will notify each Participant as soon as practicable prior to the effective date of such proposed transaction. To the extent it has not been previously exercised (with respect to an Option or Stock Appreciation Right) or vested (with respect to an Award other than an Option or Stock Appreciation Right), an Award will terminate immediately prior to the consummation of such proposed action.

13.4��Transferability of Awards. Except as provided below, no Award and no Shares subject to Awards described in Section�9 that have not been issued or as to which any applicable restriction, performance or deferral period has not lapsed, may be sold, assigned, transferred, pledged or otherwise encumbered, other than by will or the laws of descent and distribution, and such Award may be exercised during the life of the Participant only by the Participant or the Participants guardian or legal representative. To the extent and under such terms and conditions as determined by the Committee, a Participant may assign or transfer an Award (each transferee thereof, a Permitted Assignee) to (a)�the Participants spouse, children or grandchildren (including any adopted and step children or grandchildren), parents, grandparents or siblings, (b)�to a trust for the benefit of one or more of the Participant or the persons referred to in clause (a), (c)�to a partnership, limited liability company or corporation in which the Participant or the persons referred to in clause (a) are the only partners, members or shareholders or (d)�for charitable donations; provided that such Permitted Assignee shall be bound by and subject to all of the terms and conditions of the Plan and the Award Agreement relating to the transferred Award and shall execute an agreement satisfactory to the Company evidencing such obligations; and provided further that such Participant shall remain bound by the terms and conditions of the Plan.

13.5��Leaves of Absence/Transfer Between Locations. Unless the Committee provides otherwise or as otherwise required by applicable law, vesting of Awards granted hereunder will be suspended during any unpaid leave of absence, such that vesting shall cease on the first day of any unpaid leave of absence and shall only recommence upon return to active service. A Participant will not cease to be an employee of the Company or its Subsidiary in the case of (i)�any leave of absence approved by the Company or (ii)�transfers between locations of the Company or between the Company or its Subsidiary. For purposes of Incentive Stock Options, no such leave may exceed three (3) months, unless reemployment upon expiration of such leave is guaranteed by statute or contract. If reemployment upon expiration of a leave of absence approved by the Company is not so guaranteed, then six (6) months following the first (1st) day of such leave any Incentive Stock Option held by the Participant will cease to be treated as an Incentive Stock Option and will be treated for tax purposes as a Nonstatutory Stock Option.

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13.6��Deferral; Dividend Equivalents. The Committee shall be authorized to establish procedures pursuant to which the payment of any Award may be deferred, subject to the requirements of Section�409A. Subject to the provisions of the Plan and any Award Agreement, the recipient of an Award other than an Option or Stock Appreciation Right may, if so determined by the Committee, be entitled to receive, currently or on a deferred basis, amounts equivalent to cash, stock or other property dividends on Shares (Dividend Equivalents) with respect to the number of Shares covered by the Award, as determined by the Committee, in its sole discretion. The Committee may provide that the Dividend Equivalents (if any) shall be deemed to have been reinvested in additional Shares or otherwise reinvested and may provide that the Dividend Equivalents are subject to the same vesting or performance conditions as the underlying Award. Notwithstanding the foregoing, Dividend Equivalents distributed in connection with an Award that vests based on the achievement of performance goals shall be subject to restrictions and risk of forfeiture to the same extent as the Award with respect to which such cash, stock or other property has been distributed.

14.��MISCELLANEOUS

14.1��Award Agreements. Each Award Agreement shall either be (a)�in writing in a form approved by the Committee and executed by the Company by an officer duly authorized to act on its behalf, or (b)�an electronic notice in a form approved by the Committee and recorded by the Company (or its designee) in an electronic recordkeeping system used for the purpose of tracking one or more types of Awards as the Committee may provide; in each case and if required by the Committee, the Award Agreement shall be executed or otherwise electronically accepted by the recipient of the Award in such form and manner as the Committee may require. The Committee may authorize any officer of the Company to execute any or all Award Agreements on behalf of the Company. The Award Agreement shall set forth the material terms and conditions of the Award as established by the Committee consistent with the provisions of the Plan.

14.2��Tax Withholding. The Company shall have the right to make all payments or distributions pursuant to the Plan to a Participant (or a Permitted Assignee thereof) (any such person, a Payee) net of any applicable federal, state and local taxes required to be paid or withheld as a result of (a)�the grant of any Award, (b)�the exercise of an Option or Stock Appreciation Right, (c)�the delivery of Shares or cash, (d)�the lapse of any restrictions in connection with any Award or (e)�any other event occurring pursuant to the Plan. The Company or any Subsidiary shall have the right to withhold from wages or other amounts otherwise payable to such Payee such withholding taxes as may be required by law, or to otherwise require the Payee to pay such withholding taxes. If the Payee shall fail to make such tax payments as are required, the Company or its Subsidiaries shall, to the extent permitted by law, have the right to deduct any such taxes from any payment of any kind otherwise due to such Payee or to take such other action as may be necessary to satisfy such withholding obligations. The Committee shall be authorized to establish procedures for election by Participants to satisfy such obligation for the payment of such taxes by tendering previously acquired Shares (either actually or by attestation, having a Fair Market Value equal to the minimum statutory amount required to be withheld), or by directing the Company to retain Shares (having a Fair Market Value equal to the minimum statutory amount required to be held) otherwise deliverable in

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connection with the Award. The Fair Market Value of the Shares to be withheld or delivered will be determined as of the date that the taxes are required to be withheld.

14.3��Right of Discharge Reserved; Claims to Awards. Nothing in the Plan nor the grant of an Award hereunder shall confer upon any Employee or Director the right to continue in the employment or service of the Company or any Subsidiary or affect any right that the Company or any Subsidiary may have to terminate the employment or service of (or to demote or to exclude from future Awards under the Plan) any such Employee or Director at any time for any reason. Except as specifically provided by the Committee, the Company shall not be liable for the loss of existing or potential profit from an Award granted in the event of termination of an employment or other relationship. No Employee or Director shall have any claim to be granted any Award under the Plan, and there is no obligation for uniformity of treatment of Employees or Directors under the Plan.

14.4��Prospective Recipient. The prospective recipient of any Award under the Plan shall not, with respect to such Award, be deemed to have become a Participant, or to have any rights with respect to such Award, until and unless such recipient shall have executed an agreement or other instrument evidencing the Award and delivered a copy thereof to the Company, and otherwise complied with the then applicable terms and conditions.

14.5��Date of Grant. The date of grant of an Award will be, for all purposes, the date on which the Committee makes the determination granting such Award, or such other later date as is determined by the Committee. Notice of the determination will be provided to each Participant within a reasonable time after the date of such grant.

14.6��Substitute Awards. Notwithstanding any other provision of the Plan, the terms of Substitute Awards may vary from the terms set forth in the Plan to the extent the Committee deems appropriate to conform, in whole or in part, to the provisions of the awards in substitution for which they are granted.

14.7��Cancellation of Award. Notwithstanding anything to the contrary contained herein, an Award Agreement may provide that the Award shall be canceled if the Participant, without the consent of the Company, while employed by the Company or any Subsidiary or after termination of such employment or service, engages in activity that violates any agreement between the Company or any Subsidiary and Participant or upon the occurrence of other specified events, as determined by the Committee in its sole discretion. Such events may include, but shall not be limited to, fraud, breach of a fiduciary duty, restatement of financial statements as a result of fraud or willful errors or omissions, termination of employment for cause, violation of material Company and/or Subsidiary policies, breach of noncompetition, confidentiality, or other restrictive covenants that may apply to the Participant, or other conduct by the Participant that is detrimental to the business or reputation of the Company and/or its Subsidiaries. The Committee may provide in an Award Agreement that if within the time period specified in the agreement the Participant establishes a relationship with a competitor or engages in an activity referred to in the preceding sentence, the Participant will forfeit any gain realized on the vesting or exercise of the Award and must repay such gain to the Company. The Committee also may require the application of this Section�14.7 with

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respect to any Award previously granted to a Participant even without any specified terms being included in any applicable Award Agreement to the extent required under applicable laws.

14.8��Stop Transfer Orders. All certificates for Shares delivered under the Plan pursuant to any Award shall be subject to such stop-transfer orders and other restrictions as the Committee may deem advisable under the rules, regulations and other requirements of the Securities and Exchange Commission, any stock exchange upon which the Shares are then listed, and any applicable federal or state securities law, and the Committee may cause a legend or legends to be put on any such certificates to make appropriate reference to such restrictions.

14.9��Investment Representations. As a condition to the exercise of an Award, the Company may require the person exercising such Award to represent and warrant at the time of any such exercise that the Shares are being purchased only for investment and without any present intention to sell or distribute such Shares if, in the opinion of counsel for the Company, such a representation is required.

14.10��Inability to Obtain Authority. The inability of the Company to obtain authority from any regulatory body having jurisdiction or to complete or comply with the requirements of any registration or other qualification of the Shares under any state, federal or foreign law or under the rules and regulations of the Securities and Exchange Commission, the stock exchange on which Shares of the same class are then listed, or any other governmental or regulatory body, which authority, registration, qualification or rule compliance is deemed by the Companys counsel to be necessary or advisable for the issuance and sale of any Shares hereunder, will relieve the Company of any liability in respect of the failure to issue or sell such Shares as to which such requisite authority, registration, qualification or rule compliance will not have been obtained.

14.11��Nature of Payments. All Awards made pursuant to the Plan are in consideration of services performed or to be performed for the Company or any Subsidiary, division or business unit of the Company. Any income or gain realized pursuant to Awards under the Plan and any Stock Appreciation Rights constitute a special incentive payment to the Participant and shall not be taken into account, to the extent permissible under applicable law, as compensation for purposes of any of the employee benefit plans of the Company or any Subsidiary except as may be determined by the Committee or by the Board or board of directors of the applicable Subsidiary.

14.12��Other Plans. Nothing contained in the Plan shall prevent the Board from adopting other or additional compensation arrangements, subject to shareholder approval if such approval is required; and such arrangements may be either generally applicable or applicable only in specific cases.

14.13��Severability. The provisions of the Plan shall be deemed severable. If any provision of the Plan shall be held unlawful or otherwise invalid or unenforceable in whole or in part by a court of competent jurisdiction, such provision shall (a)�be deemed limited to the extent that such court of competent jurisdiction deems it lawful, valid and/or enforceable and as so limited shall remain in full force and effect, and (b)�not affect any other provision of the Plan or part thereof, each of which shall remain in full force and effect. If the making of any payment or the provision of any

-24-

other benefit required under the Plan shall be held unlawful or otherwise invalid or unenforceable by a court of competent jurisdiction, such unlawfulness, invalidity or unenforceability shall not prevent any other payment or benefit from being made or provided under the Plan, and if the making of any payment in full or the provision of any other benefit required under the Plan in full would be unlawful or otherwise invalid or unenforceable, then such unlawfulness, invalidity or unenforceability shall not prevent such payment or benefit from being made or provided in part, to the extent that it would not be unlawful, invalid or unenforceable, and the maximum payment or benefit that would not be unlawful, invalid or unenforceable shall be made or provided under the Plan.

14.14��Construction. As used in the Plan, the words include and including, and variations thereof, shall not be deemed to be terms of limitation, but rather shall be deemed to be followed by the words without limitation.

14.15��Unfunded Status of the Plan. The Plan is intended to constitute an unfunded plan for incentive compensation. With respect to any payments not yet made to a Participant by the Company, nothing contained herein shall give any such Participant any rights that are greater than those of a general creditor of the Company. In its sole discretion, the Committee may authorize the creation of trusts or other arrangements to meet the obligations created under the Plan to deliver the Shares or payments in lieu of or with respect to Awards hereunder; provided, however, that the existence of such trusts or other arrangements is consistent with the unfunded status of the Plan.

14.16��Governing Law. The Plan and all determinations made and actions taken thereunder, to the extent not otherwise governed by the Code or the laws of the United States, shall be governed by the laws of the State of Washington, without reference to principles of conflict of laws, and construed accordingly.

14.17��Effective Date; Termination. This amendment and restatement of the Plan shall be effective on the Restatement Date. Awards may be granted under the Plan at any time and from time to time on or prior to the tenth anniversary of the earlier of the adoption of the amendment and restatement of the Plan or the approval of the Plan by the Companys shareholders, on which date the Plan will expire except as to Awards then outstanding under the Plan. Such outstanding Awards shall remain in effect until they have been exercised or terminated, or have expired.

14.18��Foreign Employees. Awards may be granted to Participants who are foreign nationals or employed outside the United States, or both, on such terms and conditions different from those applicable to Awards to Employees employed in the United States as may, in the judgment of the Committee, be necessary or desirable in order to recognize differences in local law or tax policy. The Committee also may impose conditions on the exercise or vesting of Awards in order to minimize the Companys obligation with respect to tax equalization for Employees on assignments outside their home country.

14.19��Compliance with Section�409A. This Plan is intended to comply and shall be administered in a manner that is intended to comply with or be exempt from Section�409A and shall be construed and interpreted, including without limitation with respect to ambiguities and/or

-25-

ambiguous terms, in accordance with such intent, except as otherwise specifically determined in the sole discretion of the Committee. To the extent that an Award or the payment, settlement or deferral thereof is subject to Section�409A, the Award shall be granted, paid, settled or deferred in a manner that will comply with Section�409A, except as otherwise determined by the Committee. Each payment or benefit under this Plan and under each Award Agreement is intended to constitute a separate payment for purposes of Section�1.409A-2(b)(2) of the Treasury Regulations. Any provision of this Plan that would cause the grant of an Award or the payment, settlement or deferral thereof to fail to satisfy Section�409A shall be amended to comply with Section�409A on a timely basis, which may be made on a retroactive basis, in accordance with regulations and other guidance issued under Section�409A.

14.20��Captions. The captions in the Plan are for convenience of reference only, and are not intended to narrow, limit or affect the substance or interpretation of the provisions contained herein.

14.21��Conditions to Issuance of Shares. The granting of Awards and the issuance of Shares under the Plan shall be subject to all applicable laws, rules, and regulations, and to such approvals by any governmental agencies or national securities exchanges as may be necessary or appropriate. Shares (or if applicable, cash or other property) shall not be issued pursuant to an Award unless, as determined by the Company, the issuance and delivery of the Shares (or if applicable, cash or other property) complies with all such laws, rules, regulations and approvals and will be further subject to the approval of counsel for the Company with respect to such compliance.

-26-

Page 1

July 24, 2014��Exhibit 10.2

Robert Glaser

1501 First Avenue South, Suite 600

Seattle, Washington 98134

Dear Rob:

On behalf of RealNetworks, Inc. (Real or the Company), we thank you for your service as interim Chief Executive Officer (CEO), and are pleased to offer you the position of permanent, full-time CEO. This letter contains a summary of the terms of your employment as Reals fulltime CEO, effective as of July 28, 2014 (the Start Date). You will have all of the authority and duties typically associated with that of a chief executive. You will be based at our Seattle, Washington headquarters.

Base Salary. Your annual cash base salary as CEO will be $450,000, until otherwise determined by the Board. Your base salary will be paid in accordance with the Companys normal payroll procedures and subject to all applicable withholdings.

While you provide services as CEO, you will not be entitled to receive any compensation for your services as a member of the Board of Directors (the Board) of the Company and Chairman of the Board.

Target Bonus. Your annual target bonus opportunity under Reals executive bonus plan will be 100% of your annual cash base salary. The actual bonus you receive (if any) will depend on the achievement of performance goals set by the Board. Prior to setting performance goals, the Board will review and take into consideration your input and recommendations with respect to the performance goals. Any bonus payable to you will be subject to all applicable withholdings and will be paid no later than March 15 of the year immediately following the year in which it was earned.

Stock Option Grants. As a supplement to your cash salary, during each calendar year in which you remain full-time CEO, you will receive, subject to Board approval, a Real stock option (each, an Option) valued at $150,000 (determined on the grant date based on the Black-Scholes valuation methodology). Each Option will be scheduled to vest in twelve (12) equal, monthly installments commencing on January 1 of the calendar year in which the Option is granted, subject to your continued service with Real through each applicable vesting date. Specifically, for purposes of determining vesting only, the Option will be considered to have been granted on January 1 of the applicable calendar year. Thus, for example, if an Option is granted to you on June 15^th of a given calendar year, as of the grant date of the Option, the Option will be considered to be 6/12^th vested (because 1/12^th will be considered to have vested on each of January 1 through June 1). In this example, an additional 1/12^th of the Option will vest on each of July 1 through December 1, subject in each case to your continued service to Real through the vesting date as an employee, Board member or consultant. The Option will remain exercisable until the earlier of three years following your termination of service with Real (which service will include service as a Board member or as a consultant to Real) or the last day of the maximum term of the Option, which will be seven years from the grant date. Each Option will be subject to the terms and conditions of the Companys 2005�Stock Incentive Plan (or any successor plan) and the applicable

Page 2

stock option agreement. As part of its annual review of your compensation, the Board may adjust the value of future Options granted to you under this paragraph.

Promotion Restricted Stock Unit Grant. At the next regularly scheduled Board meeting following the Effective Date and subject to the Boards approval, you will be granted a restricted stock unit award covering shares of Real common stock (the Promotion Award) with a grant date value equal to $750,000. The Promotion Award will be scheduled to vest on the third (3^rd) anniversary following the grant date of the Promotion Award, subject to your continued service with Real through the vesting date. The Promotion Award will be subject to the terms and conditions of the Companys 2005 Stock Incentive Plan and restricted stock unit agreement thereunder. The Company will pay on your behalf any notification filing fees with respect to any shares of Real common stock issued under the Promotion Award as may be required under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended. The Companys payment of the fees related to your Promotion Award will be taxable income to you and will be subject to applicable withholdings.

Benefits. As CEO, you will be eligible to participate in the Companys benefit plans on terms at least as favorable as available to other senior executives. The Company may modify the Companys benefits and programs at any time and from time to time as it deems necessary and/or appropriate. In the event of your termination of employment or termination of your services as CEO, whether or not in connection with a change in control of the Company or other corporate transaction of the Company, you will not be eligible to receive any severance payments or benefits except as may be established under the Companys then-existing severance and benefit plans and practices or pursuant to other written agreements between you and the Company.

Severance. As CEO, you will be eligible to receive the severance benefits as described in the CEO Severance Agreement entered into between you and the Company dated July 24, 2014 (the Severance Agreement), subject to the terms and conditions set forth therein.

Stock Ownership. While you are CEO, you will be expected to hold shares of Company common stock with an aggregate value equal to at least ten (10) times your annual base salary.

Conflict of Interest. By accepting this offer of employment, you agree that, during the term of your employment with the Company, you will not engage in any other employment, occupation, consulting or other business activity directly related to the business in which the Company is now involved or becomes involved during the term of your employment, nor will you engage in any other activities that conflict with your obligations to the Company. Similarly, you agree not to bring any third party confidential information to the Company, and that in performing your duties for the Company you will not in any way utilize any such information. By executing this letter below, you agree to hold in confidence and trust and to act in a fiduciary manner with respect to all confidential information provided to or learned by you in connection with this letter and your rights under this letter, except to the extent otherwise required by law. To avoid doubt, the Company agrees and acknowledges that your current investments as disclosed to the Company as of July 14, 2014, and your involvement with Accel as a venture partner, do not constitute a conflict for purposes of this paragraph or the Conflicts of Interest section of the RealNetworks, Inc. Code of Business Conduct and Ethics (the Code), and that you may maintain your current investments and continue your involvement with Accel as a venture partner without violation of this section or the Code.

Page 3

Confidential Information and Arbitration. As a condition of your employment, you also are required to sign and comply with the Companys standard Development, Confidentiality and Noncompetition Agreement (the Confidentiality Agreement) which requires, among other provisions, the assignment of patent rights to any invention made during your employment at the Company, and nondisclosure of Company proprietary information. In the event of any dispute or claim relating to or arising out of our employment relationship, you and the Company agree that�any and all disputes between you and the Company will be fully and finally resolved by binding arbitration in Seattle, Washington.

At-Will Employment. The Board is excited about your returning to the full-time CEO position and looks forward to a beneficial and productive relationship. Nevertheless, you should be aware that your employment with the Company is for no specified period and constitutes at-will employment. As a result, you are free to resign at any time, for any reason or for no reason. Similarly, the Company is free to conclude its employment relationship with you at any time, with or without cause, and with or without notice. As an employee of the Company you will be subject to, and required to abide by, the Companys rules, standard and policies as may be adopted or amended from time to time.

Indemnification and D&O Insurance. Subject to applicable law, you will be provided indemnification to the maximum extent permitted by the Companys and its subsidiaries and affiliates Articles of Incorporation or Bylaws, including, if applicable, any directors and officers insurance policies, with such indemnification to be on terms determined by the Board or any of its committees, but on terms no less favorable than provided to any other Company executive officer or director and subject to the terms of any separate written indemnification agreement.

Entire Agreement. This letter, together with the Severance Agreement, constitute the complete agreement between you and the Company regarding the terms of your employment as CEO, contain all of the terms of your employment with the Company as CEO and supersede any prior agreements, representations or understandings (whether written, oral or implied) between you and the Company regarding your employment with the Company. Notwithstanding the foregoing, nothing herein shall operate to limit, release or waive your rights pursuant to the Washington Business Corporation Act, the Companys Article of Incorporation and Bylaws, or individual contract including (i)�to be defended and indemnified by the Company and advanced expenses with respect to any claim or proceeding to which you are, or are threatened to be, made a party because of your service as an employee, officer or director, or Chairman of the Board of the Company, or (ii) to be named, protected by and have coverage rights under the Companys insurance policies.

Attorneys Fees. The Company will reimburse you for reasonable attorneys fees incurred in the negotiation, preparation, and execution of this letter and the Severance Agreement in an amount not to exceed $40,000. Such reimbursement will be made within thirty (30) days of your submission of proper documentation of the fees to be reimbursed, but in no event later than March 15, 2015.

This letter may not be modified or amended unless agreed to in writing by you and a duly authorized officer of the Company or Board member. The terms of this Agreement will be governed and construed under the laws of the State of Washington, without regard to the conflict of laws principles thereof. If any provision hereof becomes or is declared by a court of competent

Page 4

jurisdiction to be illegal, unenforceable, or void, this letter will continue in full force and effect without such provision.

To accept the Companys offer, please sign and date this letter in the space provided below and return a copy of this letter to me by July 24, 2014. This letter will become effective as of the date last set forth below (the Effective Date).

We look forward to your favorable reply and to continuing to work with you at Real.

Sincerely,

/s/ Janice Roberts��

Janice Roberts

Chair of the Compensation Committee of the Board of Directors of RealNetworks, Inc.

Date: July 24, 2014

Agreed to and accepted:

/s/ Robert Glaser��

Robert Glaser��

Date: July 24, 2014

Exhibit 31.1

CERTIFICATION PURSUANT TO

SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, Robert Glaser, certify that:


1.	I have reviewed this report on Form 10-Q of RealNetworks, Inc.;


2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;


3.	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;


4.	The registrants other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:


a)	Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;


b)	Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;


c)	Evaluated the effectiveness of the registrants disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and


d)	Disclosed in this report any change in the registrants internal control over financial reporting that occurred during the registrants most recent fiscal quarter (the registrants fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrants internal control over financial reporting; and


5.	The registrants other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrants auditors and the audit committee of the registrants board of directors (or persons performing the equivalent functions):


a)	All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrants ability to record, process, summarize and report financial information; and


b)	Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal control over financial reporting.



Date:	November 5, 2014
�
/s/ Robert Glaser
Robert Glaser
Title:	Chairman and Chief Executive Officer
�	(Principal Executive Officer)

Exhibit 31.2

CERTIFICATION PURSUANT TO

SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, Tim M. Wan, certify that:


1.	I have reviewed this report on Form 10-Q of RealNetworks, Inc.;


2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;


3.	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;


4.	The registrants other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

��


a.	Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;


b.	Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;


c.	Evaluated the effectiveness of the registrants disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and


d.	Disclosed in this report any change in the registrants internal control over financial reporting that occurred during the registrants most recent fiscal quarter (the registrants fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrants internal control over financial reporting; and


5.	The registrants other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrants auditors and the audit committee of the registrants board of directors (or persons performing the equivalent functions):


a.	All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrants ability to record, process, summarize and report financial information; and


b.	Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal control over financial reporting.

�



Date:	November 5, 2014
�
/s/ Tim M. Wan
Tim M. Wan
Title:	Chief�Financial�Officer�and�Treasurer
�	(Principal Financial and Accounting Officer)

Exhibit 32.1

CERTIFICATION PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

(18 U.S.C. SECTION 1350)

I, Robert Glaser, Chairman of the Board of Directors and Chief Executive Officer of RealNetworks, Inc., certify, pursuant to 18 U.S.C. Section�1350, as adopted pursuant to Section�906 of the Sarbanes-Oxley Act of 2002, that the Quarterly Report of RealNetworks, Inc. on Form 10-Q for the fiscal quarter ended September�30, 2014 fully complies with the requirements of Section�13(a) or 15(d) of the Securities Exchange Act of 1934 and that information contained in such Quarterly Report on Form 10-Q fairly presents in all material respects the financial condition and results of operations of RealNetworks, Inc.

�



Date:	November 5, 2014
�	�
By:	/s/ Robert Glaser
�	Name:		Robert Glaser
�	Title:		Chairman and Chief Executive Officer
�	�	�	(Principal Executive Officer)

A signed original of this written statement required by Section�906 has been provided to RealNetworks, Inc. and will be retained by RealNetworks, Inc. and furnished to the Securities and Exchange Commission or its staff upon request.

Exhibit 32.2

CERTIFICATION PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

(18 U.S.C. SECTION 1350)

I, Tim M. Wan, Chief Financial Officer and Treasurer of RealNetworks, Inc., certify, pursuant to 18 U.S.C. Section�1350, as adopted pursuant to Section�906 of the Sarbanes-Oxley Act of 2002, that the Quarterly Report of RealNetworks, Inc. on Form 10-Q for the fiscal quarter ended September�30, 2014 fully complies with the requirements of Section�13(a) or 15(d) of the Securities Exchange Act of 1934 and that information contained in such Quarterly Report on Form 10-Q fairly presents in all material respects the financial condition and results of operations of RealNetworks, Inc.

�



Date:	November�5, 2014
�	�
By:	�/s/ Tim M. Wan
�	Name:		Tim M. Wan
�	Title:		Chief Financial Officer and Treasurer
�	�	�	(Principal�Financial�and�Accounting�Officer)

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